ALTERNATIVE MINIMUM TAX (AMT)
The much-dreaded alternative minimum tax is separate from, but parallel to, the regular income tax system. The AMT, which currently has rates of 26% (for taxable excess below $175,000) and 28% (for taxable excess above $175,000), is only paid if the minimum tax computed exceeds your regular tax liability. Most tax credits cannot be used to offset AMT liability. Current law provides for an exemption to prevent low and middle-income taxpayers from falling under the AMT requirements. The Joint Committee on Taxation (JCT) predicts that only about 823,000 individual tax returns will pay AMT in 2000. It is predicted that by 2010 90% of the burden of alternative minimum tax will fall on income levels of $100,000 and over.
However, you're more vulnerable than ever to falling victim to the AMT. Why? Under the regular tax system, exemption amounts and tax brackets are indexed for inflation. But, the AMT system doesn't provide for indexing. Thus, bracket creep will pull more and more taxpayers into the AMT system each year. The JCT estimates that by 2009, more than 9 million returns will be subject to AMT, many of those lower and middle-income taxpayers. Obviously, a result Congress never intended when this system was created. Some members of Congress have recognized this problem and are working to correct it.
If the AMT system is not revised, it could have a major impact on your income tax picture. If it does, the usual income tax planning techniques may actually be counterproductive. It's more important than ever to consult with us early in the year to determine if and when the AMT may apply to you. Call us!