- The Washington Times - Wednesday, December 28, 2005

Congress eyes

limited liability

The alternative minimum tax is becoming even stickier and could entangle even more taxpayers next year.

Congress recessed for the holidays without an agreement on how to limit the effect of the AMT for 2006. Although the AMT is expected to affect about 4 million taxpayers for 2005, that number will swell to about 21.6 million for 2006 unless Congress acts to lessen the impact.

Congress has said it will do so next year, making it retroactive to Jan. 1, but it is not clear how that will play out because other initiatives, such as extending cuts on capital gains and dividends, loom in the background.

“Congress can address that dilemma, or growing probability of AMT exposure, by passing legislation that retroactively reduces that bite, and it would probably be as simple as maintaining or increasing the exemption amount,” said John Nersesian, wealth-management strategist at Nuveen Investments.

“The exemption is used to ensure that moderate-income taxpayers do not fall victim to the tax.”

In the current tax year, married couples filing jointly with income above $58,000 may be subject to AMT, though that figure, or exemption, is dropping to $45,000 next year unless new legislation is passed. The exemption is phased out for those with higher incomes, or $150,000 for married couples filing jointly.

The AMT was never intended for the masses: It is a parallel tax system that was adopted in the late 1960s to ensure the wealthiest Americans paid their fair share of taxes by reducing the amount of deductions they could take.

The AMT was never indexed for inflation, however, and has trapped more middle-class taxpayers each year. Indeed, both proposals to revamp the tax code — announced last month by the Federal Tax Reform advisory panel — recommended eliminating the AMT.

To determine AMT tax liability, two calculations are necessary: one under the traditional tax system and another under the AMT system, where various deductions — such as state and local income taxes, property taxes, miscellaneous deductions and personal exemptions — are added back. You must pay the greater of the two.

Though the AMT rate is either 26 percent or 28 percent — a lower rate than the highest marginal tax bracket of 35 percent — it is applied to a wider base of income, making that tax bill more costly. Also, unlike the traditional tax code, the AMT isn’t a progressive tax, but a flat tax.

Those most likely to be hit are taxpayers in high-tax states including New York and California, and with many deductions, such as small-business owners whose companies are structured as pass-through entities (meaning income is reported on individual returns).

For taxpayers concerned that they might be subject to the AMT in 2006 — even if Congress does limit its reach next year — there are certain strategies to consider.

“You should be talking to your accountants and getting a projection for AMT taxes, and to the extent that you can, accelerate some deductions [that you couldn’t take under AMT] into this year,” says Holly Isdale, head of the wealth advisory group at Lehman Brothers Holding Inc.

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