Tax Mam, Inc. © 03/2005 The Individual Alternative Minimum Tax Presented by Claudia Hill, EA, MBA President’s Advisory Panel on Federal Tax Reform March

Tax Mam, Inc. © 03/2005Tax Mam, Inc. © 03/2005

The Individual Alternative Minimum Tax

Presented by Claudia Hill, EA, MBA

President’s Advisory Panel on Federal Tax ReformMarch 3, 2005


AMT -AMT -Always Means Trouble.Always Means Trouble. It’s neither an alternative,It’s neither an alternative,

nor a minimum.nor a minimum.

It’s aIt’s a “gotcha!” “gotcha!” tax. tax.

Taxpayers are discovering that the Taxpayers are discovering that the alternative minimum tax has alternative minimum tax has become their mandatory maximum become their mandatory maximum tax. tax.


Who is subject to the Who is subject to the AMT?AMT?

Anyone whose income is above the exemption amount can be hit: $58,000 for married couples, $40,250 for singles and head of households.– In 2006, the exemption drops to In 2006, the exemption drops to

$45,000/$33,750.$45,000/$33,750.

Real people, with real problems.Real people, with real problems.


AMT sends the wrong AMT sends the wrong message to taxpayers:message to taxpayers:

The AMT Penalizes –The AMT Penalizes – Having children. Having children. Incurring big medical expenses. Incurring big medical expenses. Paying state & local income, property or sales Paying state & local income, property or sales

taxes.taxes. Paying advisory fees or portfolio management Paying advisory fees or portfolio management

expenses to help earn investment income.expenses to help earn investment income. Incurring out-of-pocket costs to earn wages.Incurring out-of-pocket costs to earn wages. Paying legal expenses to receive a legal Paying legal expenses to receive a legal

settlement (except for certain civil settlement (except for certain civil discrimination suits). This includes suits to discrimination suits). This includes suits to obtain alimony or spousal support.obtain alimony or spousal support.


Business taxpayers are Business taxpayers are sent the wrong message, sent the wrong message, too. too. A duplicate set of books is required. A A duplicate set of books is required. A

second AMT version of basis second AMT version of basis information must be kept for assets information must be kept for assets until they are sold.until they are sold.

Expecting to benefit by directing your Expecting to benefit by directing your business investments in a way that is business investments in a way that is rewarded with business credits may rewarded with business credits may sound good, but don’t expect to use sound good, but don’t expect to use those credits against AMT.those credits against AMT.


The AMT is wretchedly The AMT is wretchedly complex.complex.

The nature of the complexity is The nature of the complexity is exhibited: exhibited:

in the inability to anticipate when one in the inability to anticipate when one may be subject to AMT,may be subject to AMT,

in the additional compliance burden in the additional compliance burden associated with duplicate associated with duplicate computations; and computations; and

in the lack of rationality and in the lack of rationality and intuitiveness.intuitiveness.


The AMT calculation is The AMT calculation is not intuitive.not intuitive. I’ve worked with taxpayers and AMT I’ve worked with taxpayers and AMT

planning, and I do not try to planning, and I do not try to estimateestimate its impact on a specific its impact on a specific taxpayer…I always model the taxpayer…I always model the clients’ situation, with fairly clients’ situation, with fairly sophisticated software.sophisticated software.

The stated objective of the AMT has The stated objective of the AMT has drifted so far off the mark, it rarely drifted so far off the mark, it rarely hits the target.hits the target.


The AMT is wretchedly The AMT is wretchedly complex.complex. It creates anomalies in IRS compliance It creates anomalies in IRS compliance

efforts and taxpayer contacts.efforts and taxpayer contacts. The IRS struggles in efforts to understand The IRS struggles in efforts to understand

and detect front-end processing issues and detect front-end processing issues with AMT returns, as well as identify and with AMT returns, as well as identify and pursue violations on the back end.pursue violations on the back end.

Taxpayers and their preparers err in Taxpayers and their preparers err in understating, as well as overstating AMT, understating, as well as overstating AMT, liability.liability.


The AMT The AMT CreditCredit is not is not intuitive. intuitive. Theoretically, the AMT is an advance payment Theoretically, the AMT is an advance payment

of tax on select deferral preferences. of tax on select deferral preferences. Theoretically, the credit is the mechanism to Theoretically, the credit is the mechanism to

equalize that advance payment when the equalize that advance payment when the preference is later reversed as income. preference is later reversed as income.

In reality, the credit does In reality, the credit does notnot work that way. work that way. Taxpayers can expect to wait for many years to Taxpayers can expect to wait for many years to

actually use their AMT credit.actually use their AMT credit. Unfortunately, the way the law is structured, a Unfortunately, the way the law is structured, a

taxpayer can find their AMT credit reduced, taxpayer can find their AMT credit reduced, even when it is not used to offset regular tax.even when it is not used to offset regular tax.


SummarySummary

In some circles, we might discuss In some circles, we might discuss AMT as "a riddle wrapped in a AMT as "a riddle wrapped in a mystery inside an enigma ..." But mystery inside an enigma ..." But for anyone who has found for anyone who has found themselves having to pay it, I can themselves having to pay it, I can assure you the thoughts are more assure you the thoughts are more of unfairness and entrapment. of unfairness and entrapment.


SummarySummary

The AMT as it exists today has The AMT as it exists today has mutated into a prime example of the mutated into a prime example of the law of unintended consequences.law of unintended consequences.

Unless massively revised or Unless massively revised or eliminated it will continue to ensnare eliminated it will continue to ensnare millions of unsuspecting middle and millions of unsuspecting middle and lower income taxpayers. lower income taxpayers.

AMT should not continue in its AMT should not continue in its present form.present form.

Documents

Tax Mam, Inc. © 03/2005 The Individual Alternative Minimum Tax Presented by Claudia Hill, EA, MBA President’s Advisory Panel on Federal Tax Reform March