Tax Tips

The number of taxpayers affected by the Alternative Minimum Tax (AMT) is expected to exceed 30 million in 2010. Congress continues to apply temporary fixes by increasing AMT exemptions to counteract tax rate cuts.

What is the AMT?

In 1969, Congress created the AMT to ensure wealthy Americans did not avoid paying their federal income tax by taking large deductions. Unfortunately, the AMT has not been adjusted for inflation over the years, so the AMT starts to affect middle-income tax filers unless Congress enacts a hold-harmless patch. Congress has increased or extended the AMT exemption 3 times since 2001. The Tax Increase Prevention Act 2007 (TIPRA 2007) provides a 1-year patch, raising AMT exemptions for 2007.

Who will be affected?

You're subject to the AMT if the AMT exceeds your regular tax figured from tax tables and rate schedules. In other words, you pay whichever amount is more, your regular tax or the AMT.

Several factors influence if you're affected by the tax, including these common scenarios:

• You itemized deductions and claimed large deductions for taxes and/or miscellaneous deductions subject to the 2% adjusted gross income limit.
• You took out a home mortgage or equity line of credit and used the money to do something other than buy, build or improve your home.
• You exercised incentive stock options and did not dispose of the stock in 2007.
• You claimed a large number of personal and dependent exemptions on your return.

AMT exemptions (the amount you can deduct from your AMT income) for this year:

• Married Filing Jointly and Qualifying Widow(er): $66,250
• Single and Head of Household: $44,350
• Married Filing Separately: $33,125

Phase-out rules for the AMT exemption did not change. The phase-out range is based upon alternative minimum taxable income (AMTI). The phase-out ranges for 2007 are based upon the following AMTI amounts:

• Married Filing Jointly and Qualifying Widow(er): $150,000 to $415,000
• Single and Head of Household: $112,500 to $289,000
• Married Filing Separately: $75,000 to $207,500

To find out if you're affected, use our AMT Estimator.

Deductions and the AMT

A recent report from Congress¹ shows the AMT has a disproportionate impact on residents living in particular states. It also revealed that taxpayers itemizing deductions for state and local taxes and/or miscellaneous deductions, as well as those who have larger families, are at greater risk than those who don't. And married taxpayers across a wide income range will be affected, whether they itemize or not.

Keep in mind that personal exemptions, itemized deductions for state and local taxes, and miscellaneous itemized deductions, all of which serve to reduce regular taxable income, are not deductible under the AMT. The only itemized deductions allowed under the AMT are mortgage interest used to buy, build or improve your home, charitable contributions, casualty losses, medical expenses in excess of 10% of AGI, and miscellaneous itemized deductions not subject to the 2% of AGI floor. As a result, taxpayers in certain income ranges, those who itemize and those with larger families may be hit hardest by the AMT.

New Jersey, New York, Connecticut, the District of Columbia and California have a higher percentage of taxpayers subject to the AMT. These states have many taxpayers with large incomes who pay their state's high state and local taxes. Although these taxes are deductible for regular income tax purposes, they aren't for AMT purposes, increasing the likelihood of paying AMT.

However, taxpayers in states with relatively low tax rates or those that don't have a state income tax are less likely to pay AMT. States with the smallest percentage of taxpayers subject to the AMT are Tennessee, South Dakota, Alaska, Alabama and Mississippi.

¹ Congressional Research Service report, "Alternative Minimum Taxpayers by State: 2003, 2004 and Projections for 2007."