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Solving the Annual AMT Puzzle

Solving the Annual AMT Puzzle

The Alternative Minimum Tax is an important consideration at tax-time. Are you covering the bases for your clients?

When Congress enacted the Alternative Minimum Tax (AMT) in 1969, the goal was to ensure that the wealthiest among us could no longer use deductions, credits, and exclusions to escape paying income taxes. However, because Congress neglected to require that the amount of income exempted from the AMT calculation be indexed for inflation each year, millions of middle-income taxpayers since have fallen into its clutches.

"We know that Congress never intended for the AMT to hit middle income taxpayers the way it has in recent years, yet they have been unable to agree on any kind of permanent solution," says CPA Nancy Faussett.

Over the past several years, Congress has enacted a series of AMT "patches" that raised the AMT income exemption amount. The most recent adjustment, passed in December 2010, raised the exemption amounts to $74,450 for joint filers and $48,450 for single filers for 2010 and 2011. Whether a permanent solution will be found in 2012 — a Presidential election year — remains to be seen.

"Every year, Congress discusses it, everybody seems to agree that something needs to be done, and yet nothing happens," says Faussett.

While there is no way to know what will happen to the AMT in the future, there are several ways you can ensure your individual taxpayer clients are complying with the current AMT rules while not overpaying their taxes. These include:

  • Optimizing state withholding taxes to ensure clients don't overpay or withhold too little (state taxes are not deductible for AMT purposes).
  • Recommending that clients do not prepay property taxes, as this could subject them to AMT liability.
  • Accelerating income and short-term capital gains, depending on your client's tax bracket.

Keep in mind that AMT planning requires you to look ahead several years. If a client is not subject to AMT this year but may be subject to it next year, they may need to do the opposite of the recommendations listed above.

Corporations and the AMT Corporations joined the annual AMT dance with passage of the 1986 Tax Reform Act. "Congress applied the same logic that it applied when it enacted the individual AMT," says Faussett. "The consensus was that it was unfair to allow high income taxpayers, be they individuals or corporations, to escape paying income taxes."

Faussett suggests that, rather than relying on spreadsheets, both corporate and individual tax return preparers should use tax planning software to model "what-if" scenarios and other comparisons to avoid unpleasant AMT surprises. Failure to calculate corporate AMT exposure accurately can result in overpayment of taxes due to:

  • Improper maintenance of AMT attributes, thus limiting the ability to reduce taxes by reducing Alternative Minimum Taxable Income via preferences and adjustments or cumulative Adjusted Current Earnings.
  • Underutilization of AMT Net Operating Loss.
  • Underutilization of General Business Credit when the Tentative Minimum Tax (TMT) is not optimized.

The complexities of the Alternative Minimum Tax will likely bedevil CPAs, CFOs, and taxpayers alike for years to come. That's why tax professionals should consider incorporating tax-planning software into their practice.