ALTERNATIVE MINIMUM TAX AMT (aka ANOTHER METHOD TO TAX)

Will it affect you? The AMT calculation is one that every individual must work through in addition to the calculation of tax under normal rules. The final tax bill is the larger of that calculated under both sets of rules.

The AMT was created in 1978 to prevent a small number of high-income individuals from avoiding income tax entirely through the use of deductions, tax credits and other "tax preference items". The tax brackets and other items under the regular income tax have been indexed for inflation since 1986. Not so with the AMT tax brackets and exemptions.

Inflation has subjected a growing number of taxpayers to the AMT every year, and the AMT is hitting larger numbers of middle-income taxpayers. In 2000, 1.3 million taxpayers paid the AMT.

Because the new tax law reduces the tax bill computed under normal rules without reducing that computed under AMT rules, it will push many more people into owing

AMT. Under prior law, the number of taxpayers subject to the AMT was expected to reach 20 million by 2010. Under the new law, it is expected to grow to 36 million.

Those who become subject to the AMT will receive less tax savings then they otherwise would.

Individuals who are already subject to the AMT will receive little tax savings under the new law, since it does almost nothing to reduce tax computed under AMT rules.

It is not difficult to identify the risk of incurring the AMT, and to make a rough calculation of the amount of possible AMT liability for yourself. But rules for calculating the AMT are complex. To accurately project your AMT liability, you should consult a tax professional or visit a web site such as 1040tools.com

What "kicks in" AMT?

Liability for the AMT results when specified preference and adjustment items that reduce tax under normal rules become too large relative to total income. The following items frequently cause AMT liability:

· Deduction for state and local income and property taxes

· Miscellaneous itemized deductions, especially deductions of employee business expenses.

· Incentive stock options. (ISO's) - held, not sold at year-end

· Accelerated depreciation.

Who typically is subject to AMT?

· High-income individuals who live in states with high personal income tax or property tax rates.

· Executives who have large employee business expense deductions and/or who exercise ISOs.

· Owners of business proprietorships and pass-through entities, such as S corporations, partnerships and limited liability companies.

How to Avoid AMT.

Congress is currently reviewing several proposals to modify or eliminate the Alternative Minimum Tax. But, until lawmakers get their act together, what can you do to minimize your exposure to AMT?

As always, the answer is planning. If you fear you're going to be subject to the AMT, your strategy is to accelerate income and defer deductions.

Under the AMT, you're going to be taxed at a 25% or 28% rate. If you're in a higher bracket under the regular tax computation, income acceleration will yield a smaller net tax under the AMT. Alternatively, deduction deferral to a year in which you're in that higher bracket should give you a greater tax benefit.

To accelerate income, you can:

· Take prepayments of salary or bonus.

· Redeem Series EE U.S. Savings Bonds.

· Redeem certificates of deposit.

· Recognize short-term capital gains.

· Convert tax-free bonds to higher yielding taxable bonds.

· Withdraw money from your IRA or other retirement funds.

To defer deductions, you can:

· Depreciate rather than deduct business furniture and equipment.

· Hold off on the payment of non-AMT deductible items (i.e., state income tax, property tax).

Normally, one might think of making their January estimated state tax payment on Dec. 31 in order to get the deduction in the earlier year. But, if you're subject to the AMT, you won't get any tax benefit from either payment--they're added back into your income as a preference. So, effective tax planning here would move you to bunch such taxes into a year where they're allowable--i.e. when you won't be subject to the AMT. The same planning strategy applies to medical expenses, investment expenses and employee business expenses.

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