Your Taxes: You Don't Have to Be Rich Anymore to Worry About AMT

From young dot-com employees to secretaries at Microsoft(MSFT), the alternative minimum tax is showing up on the most unexpected tax returns.

This parallel tax system became effective in 1970 to ensure that everyone -- even the superrich -- pays at least some income tax. So the Internal Revenue Service requires those with large deductions to also calculate their tax bill under AMT rules, which disallow standard and personal exemptions, credits for state taxes paid or miscellaneous itemized deductions.

But because the trigger point for AMT is not indexed for inflation, that tax is showing up on more and more returns from middle-class taxpayers. There was a 29.3% increase in the number of people that had to pay AMT from 1996 to 1997, the latest years for which IRS figures are available.

You can be sure that number has risen significantly in the last few years as more and more workers are receiving incentive stock options as part of their compensation packages. If there's a big difference between the strike price of your options and their fair market value at exercise, that "spread" can make you eligible for AMT, even if you aren't technically rich.

The broadening reach of AMT is "a trend that is growing and likely to increase unless something is done about it," says Bob Trinz, editor at RIA, an information provider to tax professionals

The number of taxpayers in the $30,000 to $39,000 income category having to pay AMT will more than double from a projected 7000 in 2001 to 16,000 in 2009 if AMT isn't addressed, according to the Congressional Joint Committee on Taxation.

But don't rely on Congress to fix this anytime soon. You're better off arming yourself with information so you can prevent any AMT surprises.

There are a couple of key things to understand about AMT. The first is that even if you're not rich, you're required to calculate your tax bill two ways -- under the regular tax system and under the AMT system. (If you use TurboTax or some other tax software program, this is done automatically.) The higher tax bill is the amount due to Uncle Sam.

The second is that there's a crossover point where your income jumps from regular tax to AMT. Knowing this point can help with your tax planning and prevent a panic attack next April 15.

Martin Nissenbaum, national director of personal income tax planning at Ernst & Young was kind enough to calculate some crossover points for us.

Based on the chart below, a married couple filing jointly with taxable income of $100,000 (excluding capital gains) will cross over to AMT-land once "AMT adjustments" exceed $30,770.

If Your Taxable Income Is	You'll Owe AMT if Your 'Adjustments' Exceed
	Single	Married Filing Jointly
$50,000	$24,472	$26,924
100,000	28,518	30,770
150,000	28,888	31,758
200,000	31,075	33,284
Source: Ernst & Young

Note that the amounts in the column labeled "regular taxable income" aren't ranges. They're just selected examples that will give you a rough idea of where you may fall on the scale. The chart also doesn't take into account capital gains income, which complicates matters. Suffice it to say, if you have capital gains income, be extra vigilant about your AMT eligibility.

Now let's define "AMT adjustments." They're basically all the credits and adjustments that reduce your taxes under the regular system. But under the AMT system, they're disallowed.

To get a general idea of your AMT vulnerability, add the adjustments up and check the chart. If the total is above the crossover point for your income level, you may have to pay AMT.

AMT adjustments can include the following:

• Personal exemptions. That's $2800 per person for the current tax year.

• The standard deduction (if you claim it), which currently ranges from $3675 to $7350, depending on filing status. If you itemize your deductions, don't include the standard deduction.

• State and local taxes, real estate taxes and any miscellaneous items that are deductible once they exceed 2% of your adjusted gross income.

• Medical expenses. For regular tax purposes, they're deductible once they exceed 7.5% of adjusted gross income. But for AMT purposes, the threshold is 10%. So when calculating your AMT adjustments, factor in the 2.5-percentage-point difference.

• The "spread" from any incentive stock options you exercised. The spread is the difference between your strike price and the fair market value of the stock on the day you exercised.

• Home equity loan interest. For regular tax purposes, it's fully deductible. But for AMT, it is only deductible if you use the loan to finance improvements on your home or vacation home. If you used that loan, say, to buy a car, it's not deductible for AMT, says Trinz.

• State and local taxes. For regular tax purposes, you must add this amount to your gross income. But for AMT, you subtract it from your adjustments.

In AMT, you pay 26% on income up to $175,000 and 28% on amounts over that. (Those rates haven't changed in years.) On the surface, that may seem like a bargain if you're in the top 39.6% bracket. But because almost nothing is deductible under AMT, you'll be paying taxes on a much bigger chunk of income.

The end result is your AMT bill will be higher than your regular tax bill would be -- otherwise, you wouldn't be paying AMT!

Remember, these crossover points in the chart are just estimates to help you determine if AMT should be a concern. So drop your own numbers into your favorite tax program, and determine today whether AMT will be an issue for you in April.

June 15 Reminder

Your second-quarter estimated tax payment for 2000 is due at midnight tonight.

You can charge it to American Express, Discover or MasterCard by dialing 1-888-2PAY-TAX.

If you charge it over the phone, you won't have to file Form 1040-ES -- Estimated Tax for Individuals. Just keep in mind that Official Payments (OPAY) of San Ramon, Calif., the intermediary between you and the IRS, charges a "convenience" fee for using a credit card. The fee averages 3% to 4% of your payment. Check out the Official Payments Web site for the complete payment scale. And see a previous Tax Forum for more on charging your tax payments.

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