Tax Tip from the week of June 7, 2004

Watch out for the AMT

If you’re a middle-income taxpayer, a new tax threat could be stalking you. It’s the alternative minimum tax (AMT). It’s estimated that the AMT will affect about three million taxpayers this year, and unless Congress acts, around nine million more might have to pay the AMT in 2005.

Congress introduced the AMT decades ago to make sure that the very wealthy paid at least some taxes. Currently, it starts as a 26% tax applied to the first $175,000 of income above a certain exemption amount. You calculate your tax under AMT rules and under regular rules, and pay whichever is higher.

The problem is that the exemption amount was never indexed for inflation. More and more middle-income taxpayers have fallen victim to the AMT as wage levels have risen. Also, you cannot claim personal exemptions, the standard deduction, or some itemized deductions against the AMT. So, for example, if you’re a middle-income taxpayer with many dependents living in a high income tax state, you could be especially at risk.

The 2003 tax law temporarily increased the exemption amount, but it will fall back to its prior level in 2005 unless Congress acts. Recently the House passed a one-year extension of the current level, but the Senate has yet to take action. Congress's big concern is that even a one-year extension would cost an estimated $18 billion in lost taxes.

If you want to know whether the AMT threatens you and how you might plan to avoid it, contact our office for a review of your situation.

Caution:  This is an archived copy of our Tax Tip of the Week.  Tax laws change often.  Do not rely on this information without discussing the implications with Mr. Huddleston.