Alternative Minimum Tax - Not This Year!

After spending months arguing over how to find a way to "fix" the Alternative Minimum Tax, Congress voted to postpone using it in calculating your tax liability this year. (They did so without raising other taxes as well!)

As this tax affects more and more middle-income taxpayers, this postponement will not only save you a headache, but it will also save you money.

What is the Alternative Minimum Tax?
Originally enacted in 1969, this tax was designed to prevent wealthy investors from from sheltering their income (through tax shelters, deductions, etc.). However, back in 1969, Congress did not design the tax to adjust for inflation. Therefore, more and more middle-income tax payers are required to pay this tax as opposed to the typical income tax.

How does it affect my taxes?
The Alternative Minimum Tax requires taxpayers to calculate their tax liability using 2 separate tax calculations. Whichever calculation produces the largest tax liability is what you must pay. So not only is it a bigger headache, but it also costs you more money!

The Alternative Minimum Tax usually results in owing more money because you are required to add back your personal-and-dependent deductions as well as your standard deductions (if you don't itemize). If you do itemize, there are several deductions that are not allowed under the Alternative Minimum Tax - so you must be careful about what you attempt to deduct.

While this tax is beginning to sound completely unfair, taxpayers are allowed a minimum tax deduction of $62,550 (married filing jointly in 2006) or $42,500 (single in 2006). The one catch is that this exemption is reduced by 25 cents for each dollar of income of $150,000. After all the deductions have been calculated, the AMT rates of 26% on the first $150,000 and 28% on everything over are applied.

Even though it's gone this year, how do I know if I will have to pay it next year?
Taxpayers should explore the possibility of qualifying for the Alternative Minimum Tax if your family income is greater than $75,000 and you have several large deductions (several children, mortgage interest deductions, stock options, etc.). Be sure to consult your CPA or financial adviser if you think you may have to pay this tax in the future.

We're all saved from the complications of the Alternative Minimum Tax this year. However, as this bill only postpones the tax, more people will be subject to it if it returns in 2008.

Check out the IRS's Alternative Minimum Tax Assistant tool.