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Saturday, July 08, 2006

ALTERNATIVE MINIMUM TAX OBSERVATIONS

The alternative minimum tax (the “AMT”) was initially aimed at wealthy taxpayers who qualified for significant income tax deductions and thus paid little or no income tax. In the AMT computation, such deductions and other tax preference items are not allowed or only partially allowed, and if after not allowing for such items a higher AMT tax is due than the regular income taxes, the higher AMT tax must be paid.

The number of taxpayers who are subject to AMT tax has increased significantly, as Americans earn more income and incur higher deductions. In 2006, Congress increased the income thresholds for its application, but unless such increases are extended, in 2007 the exemption levels will drop to the levels of 2000, subjecting many more people to the AMT.

A recent Congressional Research Service Report contains some interesting information about the AMT, including:

-taxpayers who claim itemized deductions for state or local taxes, miscellaneous deductions, or have large families are more likely to have to pay the AMT. This is because these are the most often used preference or add-back deductions that are disallowed or reduced in the AMT computation. This in turn leads to residents of some states having a much higher proportion of their residents being subject to AMT than others. For example, residents of states with high local tax burdens (California, New Jersey, New York) are taking more income tax deductions for those items, and thus more of them are subject to AMT when those deductions are not allowed for AMT purposes. In 2004, about 55 out of every 1,000 taxpayers in New Jersey paid AMT. In the same year, this was as low as 6 or 7 out of 1,000 in states with low local taxes.

-the number of taxpayers who will be subject to AMT in 2007 if the 2006 exemptions are not extended will increase by over 20 million from the 2004 figures. In high tax states, this increase will be felt disproportionately. For example, for California, the 606,000 taxpayers paying AMT in 2004 will rise to 4,434,000 in 2007.

-by 2010, about 31 million taxpayers will be subject to the AMT. For taxpayers with incomes in the $100,000 to $500,000 income range, it is estimated that 90% of these taxpayers will be subject to the AMT.
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