Suze Orman, Financial Guru
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Alternative Minimum Tax

Over the next ten years you will be hearing a lot about the alternative minimum tax as more taxpayers will be required to pay AMT, unless Congress takes additional efforts to reform the AMT system. The AMT is a separate tax system designed to make the super-wealthy pay their fair share of taxes. The original idea of the alternative minimum tax was to prevent a taxpayer with a substantial income, who also had significant deductions and exemptions, from avoiding a significant tax liability by hiding behind tax shelters and loopholes. But since AMT is not adjusted for inflation, it's been catching more middle-class as their incomes rises. The alternative minimum tax is calculated separately from the traditional income tax. If the alternative minimum tax calculation is higher than the regular tax, the taxpayer must pay the higher alternative minimum tax. The alternative minimum tax calculation gives either no weight or partial weight to a variety of deductions and exemptions. In addition, the alternative minimum tax calculation uses a different tax rate schedule.

The act includes modest and temporary relief from the alternative minimum tax. Effective from 2001 through 2004, the proposal would increase the alternative minimum tax exemption amount for married persons filing a joint return by $4,000 and for all other taxpayers by $2,000. 

Thus, for years 2001 through 2004, the exemption amount would be:

$49,000 for joint filers and surviving spouses (use to be $45,000)

$35,750 for all other filers (use to be $33,750)

The impact of the Act is that many more taxpayers who would have never had an alternative minimum tax problem will likely fall within the alternative minimum tax's grasp. A married couple that earns $150,000 of household income and has two children would pay about $24,500 in tax under current law. Once the act is fully effective, the couple would reap an annual savings of $2,800. But that's after the AMT shaves off about $700 of what the couple could have saved if there was no AMT. Tax payers making roughly between $70,000 and $600,000 will have a much smaller tax break than they think thank to the AMT system. Those making over $600,000 will not likely qualify for the alternative minimum tax and will enjoy the full benefits of the Act. For residents with high state income taxes and property taxes, the AMTwill hit hard.

You may have to pay AMT if you take big itemized deductions, reside in a state with high income taxes (California and New York among them), exercise stock options. Taxpayers who are vulnerable to the AMT have to calculate their taxes under both the regular tax and AMT 

The AMT will increasingly impact upper middle class taxpayers. In 1987, individual income tax returns with AMT liability numbered 140,000 --or about 1 percent of all returns filed. In 1997 the number has soared to 618,000. The Joint Committee on Taxation estimates that in 2011,this number will jump to over 16 million -- or 11.2 % of the individual tax returns expected to be filed. Without question, over the next 10 years more taxpayers will fall within the reach of the AMT, unless Congress makes fundamental changes in the law.

People First. Then Money. Then Things.
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