Alternative Minimum Tax

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	Understanding the AMT Personal Finance Advisor by Deloitte & Touche OnLine October 19, 1998

Think you can deduct your way out of a tax bill? Think again.

The Alternative Minimum Tax (AMT) was enacted to ensure that taxpayers with substantial income and large deductions paid a minimum amount of tax. AMT is a tax computed separately, and is paid only to the extent that it exceeds the regular federal tax liability. Individuals, as well as corporations, trusts, and estates are subject to AMT. Beginning in 1998, small business corporations (as defined) are exempt from AMT.

In recent years, many individual taxpayers have become subject to AMT as a result of:

The narrow difference between the regular income tax rates (15%, 28%, 31%, 36%, and 39.6%) and the AMT tax rates (26% and 28%; see below), and
The inclusion of popular tax deductions (tax preference items, or TPIs) in the AMT calculation.

In order to partially offset the impact of AMT, the Taxpayer Relief Act of 1997 included several amendments of the AMT rules. Additionally, effective tax planning can help reduce (or eliminate) an AMT liability.

Tax Preference Items: he first step of the AMT computation is to add back certain TPIs and adjustments to the taxable income amount. The result is the Alternative Minimum Taxable Income (AMTI). Typical TPIs and adjustments that must be considered include:

Standard deduction and personal exemption.
State tax refund.
Bargain element of incentive stock options (in year of exercise).
Excess of accelerated depreciation over straight-line depreciation.
Itemized deductions, for example, real and personal property taxes; state and local income taxes; deductible medical expenses; interest on home mortgage where the proceeds were not used to buy, build, or improve a home; miscellaneous itemized deductions.

AMTI Exemption: To prevent the AMT from applying to lower-income taxpayers, and those who do not have large TPIs and/or adjustments, a standard exemption reduces AMTI. For married taxpayers filing jointly, the exemption is $45,000 (smaller exemptions are available to single, head of household, and married taxpayers filing separately). The AMT exemption is reduced by 25% of the amount by which AMTI exceeds $150,000 (married filing jointly) and is eliminated at AMTI $330,000. Lower thresholds apply to single, head of household, and married taxpayers who file separately. The AMTI exemptions and phase-out ranges for 1998 are as follows:

Filing Status	Amount of Exemption	Phase Out Begins at AMTI	Exemption Eliminated at AMTI
Married filing separately	$22,500	$75,000	$165,000
Single, head of household	$33,750	$112,500	$247,500
Married filing jointly, or surviving spouse	$45,000	$150,000	$330,000

The Taxpayer Relief Act of 1997 increased the AMTI exemption for children under age 14 who are subject to tax on unearned income ("kiddie tax"). For 1998, the exemption is the lesser of $33,500, or the sum of the child's earned income plus $5,000 (after 1998, the $5,000 will be indexed for inflation). In prior years, the AMTI exemption available to a child under age 14 was tied to the parent's unused AMTI exemption.

AMT Tax Rate: For single, head of household, and married taxpayers filing jointly with AMTI less exemption of $175,000 (or less), a 26% tax rate is used to compute AMT. The cut-off point for the 26% rate for married taxpayers filing separately is $87,500 (AMTI less exemption). A 28% rate is used when AMTI less exemption is over $175,000 (single, head of household, and married filing jointly), or $87,500 (married filing separately). A provision of the Taxpayer Relief Act of 1997 applies the new lower capital gains tax rates to capital gains income included in AMTI.

Foreign Tax and Subsequent Year Credits: A credit based on foreign taxes paid (FTC) can reduce the AMT liability (up to 90% of the tentative minimum tax amount before FTC). If a taxpayer is subject to AMT in one year, a credit may be available in succeeding years to offset regular tax liability.

Worksheet: The following worksheet can help many individual taxpayers estimate their AMT liability (if any). The worksheet assumes the taxpayer does not have capital gains. For more complex situations, consult your tax advisor.

	Taxable Income	____________________
Add:	Medical Expense Deduction	____________________
	State and Local Income Taxes	____________________
	Real Estate Taxes	____________________
	Miscellaneous Itemized Deductions	____________________
	State Tax Refunds	____________________
	Bargain Element of Incentive Stock Options	____________________
	Alternative Minimum Taxable Income (AMTI)	____________________
Subtract:	Exemption Amount	____________________
	AMTI after Exemption	____________________
Multiply:	AMT Rate (26% and 28% -- see above)	____________________
	Tentative Minimum Tax (TMT) before FTC	____________________
Subtract:	AMT Foreign Tax Credit (Max. 90% of TMT)	____________________
Subtract:	Regular Tax Liability	____________________
	Alternative Minimum Tax	____________________

These are some thoughts to consider about the AMT. Contact your tax advisor can also provide information, and should be consulted before any action is taken.