Here are the basic income tax concepts:

- we pay taxes on a number that we calculate that is known as “taxable income”
- we arrive at taxable income by adding up our various sources of income and then subtracting a certain allowable number of deductions
- not all income is subject to tax
- little of what we spend each year may be taken as a tax deduction
- we then apply the appropriate income tax rate to our taxable income
- the result then is each of our individual shares of the national tax burden.

These basic concepts apply both for the AMT as well as for the Regular Tax, with differences in the individual components of the computations:

- on the income side, more is taxed under the AMT than under the Regular Tax
- on the deduction side, fewer are allowed under the AMT than under the Regular Tax.

The real “hit” from the AMT is that the tax that ultimately is due is the greater of the AMT or the Regular Tax.  This is just the way the tax law works.

Most of the AMT hit comes from the deduction side – deductions that an individual is allowed to take for the Regular Tax but is not allowed to take for the AMT.  Some deductions are not allowed at all for the AMT, while others are allowed, but to a lesser degree.  The Regular Tax deductions that are not allowed at all for the AMT are:

- the standard deduction
- the deduction for personal exemptions
- the itemized deduction for state and local taxes
- interest on certain second mortgages and home equity lines of credit
- miscellaneous itemized deductions

The Regular Tax deductions that are allowed, but to a lesser extent for the AMT are:

- the itemized deduction for medical and dental expenses
- many business expenses such as depreciation, depletion, and research expenses, among others

On the income side, there are fewer differences.  The more significant ones are:

- tax-exempt bond interest that is from a “private activity bond”
- income from the exercise of an “incentive stock option” (“ISO”)
- state income tax refunds

It is important to note that tax planning opportunities exist for each and every one of these AMT items.  Each one is different, of course, but AMT planning generally can be grouped into the following categories:

- payment of expenses that are AMT items in one year versus another
- choice of a different investment strategy in terms of stocks, bonds, etc.
- choice of a different financing strategy when taking out a loan
- choice of a different business accounting method

Certain AMT items cannot be avoided (property taxes for homeowners, for example), but because income and deductions and tax rates do not remain static from year to year, the AMT frequently can be reduced simply by moving an AMT item like property taxes into a different year.  Other AMT items may be eliminated in part or in full if they are covered by one of the other tax planning strategies listed above.

The essence of AMT planning is to 1) first determine which items are causing the taxpayer to fall into the AMT, and then 2) take the appropriate action to lessen, if not eliminate, the effect of each item.  All of the AMT-reducing planning opportunities will be individually explored in future articles.

An interesting thing to note is that Vice President Biden remains stuck in the Alternative Minimum Tax, as he has been for at least the past several years.  As we have been discussing in recent articles, the combination of the AMT exemption phaseout along with his itemized deductions is what ensnares him in the AMT trap.  The VP’s total income was just over $300 thousand, certainly not in the “rich” category by today’s standards for a couple with two incomes.  President Obama, with income in excess of $5 million, didn’t even come close to paying the AMT.

Let’s review what we have been talking about in the last few articles, using the Vice President’s return as a case study.  The reader is encouraged to look at the Bidens’return as we go through this analysis.

AMT exemption phaseout

The VP’s Alternative Minimum Taxable Income (“AMTI”) was $298,013, right in the middle of the AMT exemption phaseout range of $150,000 to $433,800 (see the May 8th article on the AMT exemption).  So instead of getting his full AMT exemption of $70,950, he was limited to an exemption of $33,947.  Was he starting to hear the AMT sucking sound at this point?  You bet he was.

Itemized deductions – state income tax

The Vice President’s state of residence is Delaware, one of the majority of states that has an income tax.  As can be seen in his tax return, he made a total of $17,718 in state tax payments in 2009 through a combination of withholdings from his and his wife’s wages as well as prior year estimated payments.  This amount properly was deducted for Regular Tax purposes, as can be seen on his Schedule A – Itemized Deductions.

As it turned out, however, Biden was significantly overpaid – more than was required to meet his obligation to the state of Delaware.  The overpayment of $4,749 is seen on his Delaware state tax return also shown on the White House web site along with the Federal return.

AMT impact from state income tax overpayment

The $4,749 overpayment by itself resulted in $1,567 in AMT.  Since this means zero in Federal tax benefit because the AMT allows no deduction for taxes, this was a wasted deduction.  Had the VP done some basic AMT planning, he would have been better off paying this in 2010 as part of his 2010 Delaware taxes.

Also, as was discussed in the May 17th article on state income taxes and the AMT, Delaware tax law only requires that 90% of an individual’s income tax needs to be paid in by December 31 in order to avoid a penalty.  Adding this 10% to the actual overpayment means that he paid another $470 in 2009 Alternative Minimum Tax that did not have to be paid.

Note also that the Vice President’s overpayment of Delaware taxes will be an AMT item – this time in his favor – on next year’s 2010 return.  Such refunds are income for Regular Tax purposes but are not for the AMT because of the absence of an AMT benefit having been received in the prior year.

Itemized deductions – property taxes

We cannot tell from the VP’s income tax return when he received his property tax bill or when it was paid, but this is another area of potential AMT savings.  As explained in the May 21st article on property tax planning, a taxpayer’s possible control over paying a property tax bill in December or in January is a factor with direct impact on the amount of Alternative Minimum Tax paid.  Refer to that article for a specific example of how this works.

AMT planning

Will the Vice President ever be able to get completely out of the Alternative Minimum Tax?  While we don’t have the information to know the answer to that question, there certainly are enough opportunities, as discussed above, for him easily to at least reduce the amount of AMT that he is paying.

Conclusion

Even though this Memorial Day weekend officially opens barbecue season, and we now have other summertime distractions like golf, tennis, or just taking some time off for a well-earned vacation, it soon may be too late to adjust state tax withholdings and to make other needed changes if you don’t start giving your 2010 AMT situation a little early thought.

Property tax assessment and billing cycles vary among the states, but the basic concept of your control over paying a tax bill in December or in January – as we previously discussed regarding state income taxes – also applies to property taxes.

Real estate taxes

As an example, here is a sample of an actual property tax bill on a $500,000 residence in a state that assesses the tax in the fall, and then gives the taxpayer a choice of payment dates in accordance with a set schedule.  With this example we can see how easy it is to have a direct impact on the AMT you pay.

The AMT-saving strategy for property taxes is extremely simple here, since you have a choice of paying your property taxes in 2010 or in January, 2011.  The simple act of when you write out the check will have a direct impact on the AMT you will pay.  As mentioned above, you get no benefit from a property tax deduction in a year you are in the AMT.  By paying your property taxes paid in a year you are not in the AMT, you will achieve real tax savings.

In this example, if you are in the AMT this year but do not expect to be in the AMT in 2011, by waiting until January to pay this bill you will save up to 35% in Federal income taxes (39.6% if the “Bush tax cuts” are allowed to expire).  This obviously is much greater than the 2% discount you will forego and the 5% penalty you will incur.

Each individual reader’s state assessment and billing cycle will vary from this example, but the concept is the same – to the extent you can, without incurring penalties with which you would not be comfortable, control even a portion of the timing of payment of your property taxes, you can save on your AMT bill.

Personal property taxes

Many states impose taxes on the value of personal property that is owned.  Common examples are automobiles, boats, RVs and the like.  Similar to real estate taxes, personal property taxes are deductible for the Regular Tax but not for the Alternative Minimum Tax, so here is one more planning opportunity.

Assume your personal property tax rate is 1.5%, for example, and you have a $40,000 car.  Your tax will be $600.  If you have the opportunity to pay this in one year versus another (the December – January example above), this could be an easy way to shave a few hundred dollars off your AMT bill.

Conclusion

Property taxes represent one of the easiest AMT planning opportunities.  It is not hard to take a quick look at last year’s property tax bills to see when they were received and when they are payable.  A little advance planning right now potentially can save thousands in taxes if the AMT is taken into consideration when paying these bills.

If you are stuck in the AMT, you are getting no benefit from your state income taxes paid – they simply are disallowed as a deduction in computing the Alternative Minimum Tax.  But if you could move some of your deductions to a year when you are not in the AMT, you could achieve real tax savings – up to the 35% depending on your tax bracket.

Essentials of state tax payments

There are two essential things to remember in planning your state income tax payments in order to reduce your AMT

One is that no state requires you to pay in 100% of your state tax liability – the required percentage generally is 80% or 90%.  If you don’t pay in this minimum required amount you may be subject to an underpayment penalty, which usually is calculated in a manner similar to interest.

Second is that if you make quarterly estimated tax payments, the fourth quarter payment generally is due on January 15 – for example, January 15, 2011 for the fourth quarter installment of your 2010 taxes.  This is the way the IRS works, and most states follow this pattern.

Control over that last portion of state taxes due

Remembering the above key facts, the AMT-saving strategy is to look at the control you have over the payment of this last portion of your state taxes  – the fourth quarter installment, if applicable, and/or the last 10 or 20 percent you will owe.  Since you have the choice of paying a portion of your state income taxes either in December of the current year, or in January or even April of the following year, the decision on when you write out the check to pay these taxes will have a direct impact on the AMT you will pay.

By having more of your state income taxes paid in a year when you are not in the AMT, you will achieve real tax savings.

An example

To illustrate how this works, assume that you expect to be in the AMT in 2010, that your total 2010 state taxes will be $15,000, and that you expect not be in the AMT in 2011.  If you could defer paying just 10% – $1,500 – of your 2010 state income tax until 2011, this could save you $500 or more depending on your tax bracket. If you could defer $3,000, your savings would be over $1,000, and so on.  Note that even if you do end in the AMT again next year, continuing to execute this strategy will mean that you will achieve this Regular Tax benefit in the first year that you are not in the AMT.  With the Democrats pushing for higher income tax rates, this becomes more and more a real possibility.

What you need to do to evaluate this AMT-saving strategy

Check on your state’s web site to determine the minimum percentage of your taxes that have to be paid in by December 31.  It likely is 80% or 90%.  Also check the rules for estimated payments and the forms that you will need to do this.  Then, using an AMT planning model like that available on amtindividual.com, try putting different numbers in the model for your state tax payments, and you quickly will see how much you might be able to save by reducing your AMT.

Good luck with your planning!

Itemized deductions

The bulk of the AMT problem actually comes from the deduction side – specifically, deductions that an individual is allowed to take in computing the Regular Tax but is not allowed to take for the AMT.  Of the different types of deductions, some are not allowed at all for the AMT, while others are allowed but to a lesser extent than they are allowed for the Regular Tax.

The deductions that are allowed for the Regular Tax but are not allowed at all for the Alternative Minimum Tax are the following:

-          the deduction for state and local taxes

-          miscellaneous itemized deductions

-          the standard deduction

-          the deduction for personal exemptions

The deductions that are allowed for the Regular Tax but are allowed only to a lesser extent for the AMT are these:

-          the itemized deduction for medical and dental expenses

-          the deduction for interest paid

-          many business expenses such as depreciation, depletion, and research expenses, among others

State and local taxes affect more than 90% of all AMT payers

Of the deductions listed above, the single one that impacts almost every individual caught in the AMT trap is the deduction for state and local taxes.  These are relatively large dollar items for most taxpayers, and, as mentioned above, they are not deductible at all for the AMT.

The term “state and local taxes” includes the following:

-  State income taxes.  Forty-three states impose a state income tax, and some of them – New York and California come to mind along with numerous others – have fairly high tax rates for folks who are at the income levels already being affected by the AMT.  (Residents of the following states are the lucky ones who do not share this burden: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.)

-  Local income taxes.  Many cities across the United States impose their own income taxes.  New York City, of course, has one, and other cities across the nation – Louisville, Kentucky is one other example – also have them.  New York City’s tax rate ranges from 2.9% to 3.6% of taxable income, while Louisville’s is 2.2% on gross earned income – no deductions allowed.  Taxes like these quickly compound the AMT problem.

-  Real estate taxes.  Owners of real estate pay property taxes on the value of the property (an “ad valorem” tax).  Many states – you know if you live in one – have high property taxes.  Again, a big AMT problem.

-  Personal property taxes.  It is not uncommon for states and local jurisdictions to impose a property tax on personal property.  “Personal” is a legal term meaning tangible but moveable property such as cars and boats.  Check the tag renewal notice on your car, for example, to see how much this is.

-  Sales taxes.  All states but six impose a sales tax.  On the Federal return the taxpayer has an option to deduct state and local sales taxes in lieu of income taxes.  In the seven states with no income tax this election generally proves beneficial in computing the Regular Tax – but of course it is no help when it comes to the AMT.

In the next article we’ll look at the effect these lost itemized deductions have on calculation of the AMT, and we also will review the significant tax planning opportunities that they present.

The AMT exemption phase-out

As taxable income increases above $150,000, the AMT exemption amount decreases.  A taxpayer loses $1 of exemption for every $4 increase in taxable income.  Thus, for example, if taxable income before exemption is $250,000 ($100,000 over the threshold), $25,000 of the AMT exemption is lost.  All other things being equal, in this example AMT taxable income would be $275,000 even though Regular Tax taxable income would be $250,000 – making it likely you would find yourself stuck in the AMT.

Note that this phase-out formula means your AMT taxable income increases at a more rapid rate – 25% faster – than any increase in your Regular Tax taxable income.  This acceleration is a significant part of what pulls individuals quickly into the AMT.

Dividends and capital gains

Under current law, dividends and long-term capital gains are taxed at a lower bracket – typically 15% – for both the Regular Tax and for the AMT.  In theory, using this same bracket prevents dividends and capital gains from triggering the AMT.

Unfortunately, however, dividends and capital gains are included as part of taxable income, so they, like all other income, have a direct impact on an individual’s AMT because of the extra 25% effect discussed above.  It’s easy to be fooled by this one.

Beyond the AMT exemption phase-out

For taxpayers who make “a lot” of money (defined below), the AMT rapidly becomes much less of a concern.  There are two forces at work here as income gets into higher levels:

First is that the AMT exemption phase-out simply stops at a certain point.  For MFJ, the phase-out stops at taxable income of $433,800.  At this point, the $283,800 of income over the initial $150,000 means (at the 4-to-1 ratio described above) the $70,950 exemption is completely gone ($70,950 times 4 equals $283,800).  After this, AMT income grows at the same rate as does Regular Tax taxable income, so the 25% penalty no longer applies.

Second is that, at this level of income, the taxpayer now is paying Regular Tax at a significantly higher bracket than the AMT bracket.  Looking at the above tax bracket schedules, one can see that the taxpayer now is well into the 35% Regular Tax bracket, leaving far behind the maximum 28% AMT bracket.  Remembering that a taxpayer pays the greater of the Alternative Minimum Tax or the Regular Tax, at these levels of income it is unlikely the taxpayer will be in the AMT.

Summary

Once a MFJ couple exceeds the $150,000 taxable income level, the sucking sound of the AMT vortex pulls them in at a rapidly-increasing rate.  But for the wealthy – ironically, those at whom the original Minimum Tax was aimed when it was first enacted over 40 years ago – they can safely sit on the sidelines and not even be concerned.  This is why, in the tax returns disclosed in the 2008 Presidential campaign, we saw that Joe Biden, John McCain and Sarah Palin – each making in the neighborhood of $250,000 – all were caught in the AMT trap, while President Obama with his millions from book royalties was not even touched by it.

Next – itemized deductions as the major difference between Regular Tax taxable income and AMT taxable income.

Through the month of May we will be publishing a series of articles explaining these themes and these calculations.  Your accountant may have closed up shop for the summer, or you simply may be tired of paying tax return preparation fees without seemingly accomplishing anything.  A little self-help on your part at this time of the year will go a long way toward understanding what happened to you in 2009 and what you can do about it for 2010.

Taxable Income, Tax Brackets and the AMT Exemption – Part I

This article and the next one will look at the basic calculations – the income tax brackets that apply for the Regular Tax, as compared to the AMT, and the AMT exemption and its phase-out and the effect this phase-out has on the computation of the Alternative Minimum Tax.

Taxable income – the starting point

While every taxpayer is different, each of us has a threshold level of income that will trigger the AMT.  What we are talking about is taxable income, which in simple terms is all of your income less all of your allowable deductions.  As a separate but parallel tax system, the Alternative Minimum Tax has different rules on what items of income must be included, and on what deductions are allowed in computing taxable income.  These differences will be explored in future articles.

Once taxable income is computed, one then looks to the tax bracket tables to compute the tax liability.

Tax brackets – the Regular Tax

Here are the 2009 Regular Tax brackets for a couple electing Married Filing Jointly (MFJ).  These and the tax brackets for the other filing statuses may be seen in the Form 1040 instructions, on page 101, found at this URL: http://www.irs.gov/pub/irs-pdf/i1040.pdf.

Tax brackets – the Alternative Minimum Tax

The AMT has one set of brackets, applying to all filing statuses.  Unlike the Regular Tax brackets, they are not indexed for inflation, so they remain constant unless Congress changes them.  These brackets can be seen on the Form 6251, found at this URL: http://www.irs.gov/pub/irs-pdf/f6251.pdf.

The AMT exemption

The AMT exemption for 2009 for MFJ is $70,950.  The exemption levels for the other filing statuses may also be found on the Form 6251 at the URL shown above.  The purpose of the exemption is to prevent taxpayers at lower levels of income from being pulled into the AMT.

For a simple example, refer in the above Regular Tax table to a couple with taxable income of $67,900.  The couple’s Regular Tax liability on this income would be $9,350, with the first $16,700 being taxed at 10% and the balance at 15%.

If there were no AMT exemption, this couple’s AMT would be $17,654 because the full $67,900 of taxable income would be taxed at the AMT’s 26% bracket – far in excess of the 10% and 15% Regular Tax brackets.  With the AMT exemption, however, this couple’s taxable income for Alternative Minimum Tax purposes is zero, so they have no concerns about the AMT.

Summary

The above illustrates the basic calculations behind the Alternative Minimum Tax and the importance of the AMT exemption.  But a provision that affects the amount of the exemption as a taxpayer’s income increases – the “phase-out” of the exemption – will be explored in the next article – Part II.

# 1 – Personal exemptions

For the Regular Tax, every taxpayer is entitled to a personal exemption deduction for himself, and his spouse and/or other dependents.  Since the AMT denies any deduction for personal exemptions, this is the single item affecting almost every individual paying the Alternative Minimum Tax.

# 2 – State and local tax deduction

This item, which consists of property taxes, state and local income taxes, and sales taxes, is only slightly behind personal exemptions in terms of the number of AMT payers affected.  The reasons for this are the relatively heavy burden of state and local taxes as well as the fact that the AMT disallows every dollar of this deduction.

# 3 -Capital gains

This is not specifically listed as an AMT item, but the impact of capital gains on an individual’s Alternative Minimum Tax can be significant.  At levels of taxable income where most AMT payers find themselves, an additional $100 of capital gains could add up to $7 of AMT being paid on top of the $15 imposed by the Regular Tax capital gains bracket.

# 4 – Miscellaneous Itemized Deductions

A taxpayer’s employee business or investment-related expenses may be deductible under the Regular Tax, but they are not for the AMT.  This affects nearly a third of all AMT payers.

# 5 – Depreciation

Business owners and investors with rental property are allowed depreciation deductions for the property used in these activities.  The AMT disallows a portion of the depreciation deduction that otherwise may be taken.

# 6 – Passive activity losses

Many investment activities are considered “passive” for tax purposes.  An example is a taxpayer who acquires an interest in an investment partnership.  As such, losses from these investments are limited in how they may be deducted for purposes of the Regular Tax.  The AMT imposes even further limitations on the use of these losses.

# 7 – Private activity bond interest

An individual investing in tax-exempt municipal bonds may receive an unpleasant surprise when he discovers that Alternative Minimum Tax has to be paid on the interest income from a certain type of municipal bond – the so-called private activity bond.  While there may be an increase in before-tax yield from this type of bond, the after-AMT results can be very disappointing.

# 8 – Standard deduction

A taxpayer is allowed no standard deduction in computing the AMT. A valuable planning idea here could mean that an AMT taxpayer might be better off not claiming the standard deduction at all.

# 9 – Medical and dental expenses

For purposes of the Regular Tax, individuals are allowed a deduction for medical and dental expenses, to the extent these expenses exceed 7.5% of Adjusted Gross Income.  The AMT limits this deduction even further by instead imposing an excess-of-10% requirement.

#10 – Limitations on investment losses

In addition to the limitation on the use of passive activity losses as discussed above, there are other investment activities, not falling under the passive rules, the losses from which still will be limited for purposes of the Regular Tax.  Again, the AMT places even further limitations on the use of these losses.

Conclusion

In addition to this top ten list, there are nearly 20 other individual items waiting to trip up the AMT payer.  The individual items that catch any particular taxpayer are shown on that individual’s Form 6251 that is attached to his tax return.  It is important to note, however, that planning opportunities exist that can lessen the impact of each and every one of these.  Check these out at AMTIndividual.com.

Annual election

The basic choice – itemizing vs. taking the standard deduction – is an election a taxpayer makes each year when the tax return is filed.  The election is binding for both the Regular Tax and the AMT; a taxpayer cannot itemize for one and take the standard deduction for the other.

Itemized deductions

The major categories of itemized deductions are Medical and Dental, Taxes, Charitable Contributions, Home Mortgage Interest, Casualty Losses, and Miscellaneous.  All of these are deductible under the Regular Tax.  Under the Alternative Minimum Tax, however, the itemized deduction categories of Taxes and Miscellaneous Itemized Deductions are disallowed in their entirety, while Charitable Contributions are fully allowed.  The categories of Medical and Dental, Home Mortgage Interest, and Casualty Losses also are allowed, at least in part.

Standard deduction

The standard deduction is a fixed dollar amount, adjusted annually for inflation.  This may be taken in lieu of itemizing deductions.  Currently this dollar amount is $11,400 for a married couple filing jointly.

Step 1 – compute the lowest Regular Tax

The Regular Tax, of course, is the starting point, and the choice here seems simple: if the standard deduction is greater than the taxpayer’s itemized deductions, then the standard deduction will result in a lower tax liability.  If the taxpayer is paying the Regular Tax, nothing more needs to be done.  If, however, the taxpayer is in the AMT, it is critical then to go to step 2 to avoid overpaying taxes.

Step 2 – recalculate the tax liability using itemized deductions

Going back to our married couple, even though their itemized deductions were less than the $11,400 standard deduction, they need to recalculate their taxes taking itemized deductions instead of the standard deduction.  Although this seemingly would increase their taxes, it may actually reduce their AMT, or even possibly even eliminate it as in the example discussed below.

Example

To illustrate how this analysis would work, assume a couple lives in Florida, a state with no income tax, and is renting their home so they have no real estate taxes or mortgage interest.  All the couple has for itemized deductions is $10,000 of charitable contributions.  They have $250,000 combined salaries and wages, and $50,000 of dividends and capital gains.

When this couple starts out with step 1, they note that their $10,000 of itemized deductions is less than the $11,400 standard deduction, so they elect to take the standard deduction.  At first blush, this seems to be the correct thing to do because their taxable income is $1,400 less by doing this than if they had itemized, but in actuality this would be a very costly mistake for them to make.

Under these facts the couple would pay $64,634 in taxes – $61,610 of Regular Tax and $3,024 of Alternative Minimum Tax.  Under the AMT, they receive no benefit from the standard deduction, and they are wasting the Alternative Minimum Tax benefit they could get from the $10,000 charitable contribution deduction.  If, instead, in this example the couple elected to itemize, their tax liability would be $62,072 – all Regular Tax, with no AMT.  Even though they gave us $1,400 in Regular Tax deductions, they saved $2,562 and completely eliminated the AMT!

Conclusion

It is critical that Alternative Minimum Taxpayers take this extra step.  At first it may seem counterintuitive to be taking the smaller of itemized deductions or the standard deduction, but thinking differently can actually end up saving significant taxes.

1.  Fill out the Form 6251

Each and every taxpayer is responsible to determine the taxes he owes, so he alone is responsible to test for the AMT.  Filling out the form is one sure way to do this; if the AMT is not owed, the form simply can be discarded.  But with the IRS estimating that it takes 21.4 hours on average to complete the Form 1040, including recordkeeping and other requirements, why add to this burden if there is any way around it?

2.  Fill out the worksheet located in the Form 1040 instructions

The IRS has plenty of instructions.  The 2009 version of the basic Form 1040 instructions is 175 pages long, and buried in among all that good knowledge is a worksheet to help taxpayers determine of they owe the AMT (for 2009 it is located on p. 41).  But this worksheet is of limited assistance because it focuses only on the basic computation, and whether a taxpayer’s itemized deductions or the phaseout of the AMT exemption is what is triggering the AMT.

What the worksheet does not do is help a taxpayer who has any of the 17 AMT items and credits that are listed there.  If a taxpayer has any one of these, he is told to “fill in Form 6251 instead of the worksheet.”

3.  Go to the IRS web site and check out its “AMT Assistant.”

This is a handy little tool, but again is of limited utility because it simply is an electronic version of the worksheet found in the Form 1040 instructions.  If a taxpayer has none of the 17 items, this can save him from having to do the actual calculations himself.  But if the taxpayer has any one of the items, it’s back to the Form 6251.

4.  If I didn’t pay it last year then I don’t owe it this year (also known as the “head in the sand” approach)

It’s probably fair to say that it is not anyone’s idea of fun to fill out IRS forms, especially if it is not necessary to do so.  So one approach is that, if the taxpayer did not owe the AMT last year, and assuming no big changes in income or deductions this year, the odds are that the AMT won’t be due again this year.  But for some taxpayers it doesn’t take much of a fluctuation in income or deductions to get caught in the AMT.  Another problem is that this approach fails miserably if Congress does not once again extend the “patch,” the annual indexing of the AMT exemption amount for inflation.  If the patch is not acted on again this year, the number of individuals owing the AMT will increase from the current 4.4 million to a projected 26.7 million.  As of today’s date, the patch has not been enacted for 2010, which means that 22.3 million taxpayers cannot rely on the test of not having paid the tax in the prior year.

5.  Use the AMT Planning Model / Dual-tax Calculator at AMTIndividual.com

Fast and easy way to help you determine if you are in the AMT and how much AMT you will owe.  It will also show you why you are in the AMT, what items are trapping you, and how to reduce or possibly eliminate the AMT in future years.  The Free edition helps individuals better understand the AMT and what items are trapping them for the most recent tax return.  The Deluxe edition is a comprehensive version that adds customized, written strategies and the AMT Planner to plan for this current year.  Go to www.amtindividual.com to learn more.