Is AMT in Your Future?

For years, the federal alternative minimum tax (AMT) was a little-known tax paid by relatively few taxpayers. That may not be true for long. The number of AMT taxpayers is expected to increase from 1.4 million in 2000 to 35.1 million in 2010, largely because of reductions in regular income-tax rates and other tax law changes enacted last year.

Some History

AMT was originally intended as a mechanism for making sure wealthy individuals pay a minimum amount of tax even if their regular tax bills are relatively low because of large deductions and other tax benefits (called “preferences”). AMT works by taking away tax breaks allowed under the regular tax system and taxing the income that results (after an exemption) at 26% or 28%.

Recent Events

More and more “average” taxpayers are finding they owe AMT, as several court cases demonstrate. In one, a couple with a large family had to pay AMT triggered primarily by their large deduction for dependency exemptions. In another, a person who received $150,000 in settlement of a job discrimination lawsuit had to pay AMT triggered because $74,000 of related legal fees weren’t deductible in computing AMT. And, just this year, an S corporation shareholder was told he owed AMT based on an adjustment related to a tax credit passed through from the corporation.

If you haven’t been hit with AMT yet, you may be in the years to come. Will AMT soon be a part of your tax picture? Stay tuned.