Find alternatives to the dreaded alternative minimum tax

Author: Gail Marksjarvis

Published: November 29, 2004

The alternative minimum tax is a dread tax that sneaks up on unsuspecting taxpayers and can cost them significantly more in income taxes than they might have imagined.

While an encounter with your tax return is a few months away, being aware of the AMT now can restrain its potential impact.

When the AMT was created more than 30 years ago, it was an extra tax intended to nab rich people clever enough to dodge regular income taxes. But recently it has been snaring the middle class because income levels established years ago haven't been updated for inflation. In addition, the 2001 federal tax cuts position an increasing number of taxpayers for the AMT, according to Leonard Burman, senior fellow at the Urban-Brookings Tax Policy Center.

So tax experts are warning taxpayers to be alert to the AMT now regardless of their income. If the AMT is going to get you when you fill out your tax return, you can't stop it. But you will want to change some of your typical tax-planning moves between now and Dec. 31.

Anticipating the AMT without doing a separate calculation is next to impossible. People with incomes between $150,000 and $300,000 are most likely to be affected, says Rande Spiegelman, vice president of financial planning for Charles Schwab. But income alone isn't the determiner. It's a combination of income and significant deductions. Some press accounts have highlighted single mothers with deductions for many children who had been subject to the AMT.

Typically, however, a middle-income person who simply takes the standard deduction isn't affected.

Tax experts say those who should be most on guard are people who take significant deductions for state and local taxes in high-tax states, have a lot of income from private-activity municipal bonds, deduct a lot of business expenses, deduct interest on a second mortgage and have significant capital gains or exercise incentive stock options.

Minnesota's taxes aren't the highest, but they are relatively high - potentially triggering the AMT when combined with other items, says Denver Gilliand, a senior vice president of U.S. Trust in Minneapolis.

The easiest way to find out if you have to be concerned about the AMT is to use Quicken's AMT Evaluator at www.quicken.com/taxes/taxslashing/amteval/ . Otherwise you must go through the complex Form 6251 available at www.irs.gov .

Taxpayers who must pay the AMT are subject to different rules than apply to regular taxes. Deductions are treated differently, and tax rates vary.

While regular tax rates start at 10 percent and can be as high as 35 percent, AMT rates range from 26 to 28 percent.

So if you find that you are going to be subject to the AMT this year, you should delay making the types of payments in 2004 that taxpayers typically rush to accumulate for tax deductions. For example, in a recent column I suggested that people could reduce their taxes this year if they make their January mortgage payment in December. (Find the column at www.twincities.com .)

But the mortgage deduction only applies to regular taxes. For AMT purposes, the mortgage payment won't work to reduce your taxes.

So if you find you are subject to the AMT, Gilliand suggests making your January mortgage payment in January.

And if you are in a high tax bracket and realize now that you will be subject to the AMT for this year, Gilliand suggests accelerating income - such as a bonus - into this year. That way you may be taxed at 28 percent rather than 35 percent.

One of the few deductions a person can use to reduce the AMT is charitable contributions. So now would be the time to give shares of stock, money, clothing, cars or household items to nonprofit organizations.