| BUSINESSWEEK ONLINE : FEBRUARY 1, 1999 ISSUE | ||||||||
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| PERSONAL BUSINESS
A Tab Meant for the Few Will Nab Many This spring, the Internal Revenue Service will treat many middle-class taxpayers as if they were millionaires. Half of the 2 million households expected to run afoul of the alternative minimum tax--designed to prevent the wealthy from sheltering income--earn $30,000 to $100,000. By 2007, 8.4 million taxpayers, or 1 in 16, should owe the AMT, which imposes a heavier burden than ordinary income tax by taxing items normally removed from Uncle Sam's reach. Why has this check on the rich become a middle-class headache? Because while incomes have risen with inflation, the AMT's exemptions of $45,000 for married couples and $33,750 for single taxpayers have been the same since 1993. To figure out whether you owe the AMT, calculate your taxable income the regular way. Then use Form 6251 to add back deductions that can't be claimed under the AMT. There are 27 in all, but the ones that trip up most people are hefty state and local taxes and miscellaneous itemized deductions, such as legal fees and unreimbursed business expenses. YOUR SHARE. Once you've calculated your taxable income, subtract $45,000 if married and $33,750 if single. Then multiply the remainder by AMT tax rates: 26% up to $175,000, and 28% beyond. That's what you would owe under the AMT. Compare that to your regular tax bill and pay whichever is higher. If you'll be hit with the AMT this April, you have 11 months to make sure it doesn't happen again. Experts suggest avoiding big deductions or lessening their impact by accelerating income. Those strategies run counter to conventional wisdom, which minimizes taxes by accelerating deductions and deferring income. Sometimes, the solution is as easy as asking your boss to pay your January bonus in December. You can also shift problematic deductions to years when you expect tO file a regular 1040. Say you plan to sell stock on retirement next year. Your accountant or tax software warns you that steep capital gains will inflate your state and local tax deductions, pushing you into the AMT. The answer: Sell over several years or sell and pay taxes now--provided your preretirement salary is high enough to shield you from the AMT. Other times, it makes sense to delay paying deductible expenses such as tax and legal bills. You may incur penalties, but if you save more by avoiding the AMT, it's worth it, says BErnard Kent, a tax partner at PricewaterhouseCoopers. Don't be surprised if your efforts to avoid the AMT fail. About 40% of people filing Form 6251 do so again the next year. A growing number are caught by incentive stock options. This increasingly common executive perk can be exercised tax-free--unless you're in the AMT. Although you can use taxes paid on ISOs to offset future regular tax bills, most deductions invalidated by the AMT cannot be reclaimed in later years. To preserve them, delay or accelerate payments into non-AMT years. Even deductions allowed by the AMT are best saved for regular tax years. At the AMT's 28% rate, charitable gifts and other write-offs shelter only 28 cents of every dollar earned, vs. 39.6 cents in the highest regular federal income tax bracket. The AMT isn't all bad. ''You can look at investment ideas you might not [otherwise] consider,'' says J.P. Morgan tax strategist Holly Isdale. Sell stocks for short-term capital gains? Buy bonds, real estate investment trusts, and other high-income investments? Why not, since gains are taxed at 28%, instead of your regular income tax rate. TIGHT SPOT. But don't ''let the tax tail wag the investment dog,'' says Michael Rubin, a CPA at Bessemer Trust. Rubin cautions that a cardinal rule of AMT planning--accelerating income to benefit from a lower tax rate--can backfire. That's because AMT exemptions are phased out for married couples with incomes of $150,000 to $330,000 and for single taxpayers earning $112,500 to $247,500. In those ranges, ''for every dollar you earn, you lose 25 cents of the exemption,'' Rubin says. Thus, each extra dollar increases taxable income by $1.25, raising the effective tax rate to 32.5% through $175,000 and 35% beyond. Will Congress rescue the middle class? Lawmakers stepped in to stop child, education, and other credits from triggering the AMT on 1998 returns--a break many think is here to stay. But as the AMT traps more taxpayers, the extra revenue it creates may stymie reform. By Anne Tergesen EDITED BY AMY DUNKIN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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