Alternative Minimum Tax
The Alternative Minimum Tax is part of the Federal Income Tax in United States. The AMT can be charged to the holders of personal income tax and corporate income tax holders. Hence the AMT is applicable for individuals and corporate too. The AMT system comprises with the taxable income, larger exemption and lower tax rates rather than regular system. The AMT is one type of tax other than regular tax. The present rate is $70950 for the year 2009 incase of joint holders and $46700 in case of single persons. For every year, the taxpayers should consider whether they have to pay Alternative Minimum Tax (AMT).
The Alternative Minimum Tax is created in 1969 since most of the individuals not paying the taxes though they are wealthy. Such people were using the deductions that are not available to the average workers. Every individual has to calculate the income tax in two different ways. The first way is to calculate the tax liability under regular system which allows tax credits and certain types of expenses. Thereafter the individual has to calculate tax based on rules of alternative minimum tax. The AMT eliminates some tax deductions and credits.
Out of the two ways, if AMT is found higher, then the individual has to pay additional tax besides regular income tax. In the initial stage, the AMT created meant for small number of high income taxpayers who were legally claiming many deductions and avoiding payment of tax. The tax law was written on the basis of present but not on future ramifications and hence future ramifications not correctly anticipated in the early stage. The AMT requires the individuals to recalculate their taxes under alternative rules which will not allow specific exemptions, deductions and other preferences.
The AMT is not alternative to tax. It is a tax in addition to regular income tax. While calculating AMT, the itemized deductions should not be taken into account. The deductions include real estate taxes, personal property taxes, though they are eligible for deduction for regular return. The goal of AMT is to make everyone to pay some federal income tax. If any individual is owe any additional tax under the AMT can be determined by filling the Form 6251. In case of individuals Form 6251 is to be used. If the tax calculated is higher than regular tax return, then the difference is AMT and to be paid.
In order to encourage workers participation, often the organizations provide stock options to address employee compensation. Similarly the term of incentive stock option has been grown. The individuals i. e. employees are given right to buy the shares of organization out of company’s stock. The purchase of such stock is predetermined period of time and with equivalent to market price. The persons need not to report about investment stock option in case of regular income tax. But the same should be reported for the purposes of AMT.
It is correct when incentive stock option is being exercised will attract the payment of alternative minimum tax. But the AMT liability can be escaped if the stock is sold within the same year. The Incentive Stock Option is one type of employee stock option and it is granted to the employees to confer U. S. tax benefit. The incentive stock option also called as ISO, Incentive share option or qualified stock option etc. While exercising ISO, the individual need not to pay any income tax or employment tax on the difference between the exercise price and fair market value of shares. However the holder of such shares must pay alternative minimum tax on the difference between exercise price and fair market value of shares. In case the holder holds the shares for more one year and sold, then long term capital gain is attracted and accordingly taxed.
Every person is subject to pay AMT for each year. However the liability of AMT can also be minimized by some planning strategies. The main goal is AMT is to deter taxpayers from excessive use of deductions, exclusions, exemptions, credits etc. In the regular tax system the taxpayer has to add total income and make deductions, exemptions etc.
then regular income tax found. On the other hand, the AMT now allow the standard deduction, personal exemptions and certain itemized deductions. The tax laws provide certain tax benefits, deductions, credits with respect to expenses. Accordantly the taxpayers avail such benefits and avoid the tax payment. The AMT has been introduced so that the persons may pay tax who have benefited out of the advantages of law. The taxpayers are liable for AMT can be recognized with the Form 1040 instructions and Form 1040A instructions. In case of Form 1040, the AMT assistant for individuals can be used.
The AMT is parallel tax system and differ from regular tax system and the difference between two calculations can be calculated on Form 6251. Some of the following strategies to applied in order to reduce the AMT liability.
- The taxpayer can opt prepayment of salary and hence such income will be added in this year. With this strategy, the salary for the next year will be lowered and tax can be saved.
- It is advisable to book hort term gain on the securities. In such case, the income will be increased for the present year, but less tax liability in the next year.In case of inve stments, it is better to withdraw funds from the investments which are tax deferred. However it is advised only when there is anticipation of increase.
- The payment of income tax on estate can also be deferred and can be paid in next year.
- Spreading of incentive stock options will minimize the concentration of preference items in the same year.
- In case of business expenditure such as expenses relating to employees, job education expenses, tax preparation expenses and other expenses can be deferred for the next year.
Income Tax Planning
The personal exemptions contribute the AMT liability. For examples the exemptions claimed with respect to self, spouse and dependents are not allowed while calculative alternative minimum tax. So it should be remembered more exemptions attract more liability of AMT. Most of the American taxpayers claim the standard deduction. Again the standard deduction is not allowed under the AMT. Instead of claiming of standard deduction, it is advisable to claim the expenditure on itemized basis so that liability may be decreased. When the expenditure is claimed under itemized basis, it will be advantage in state tax, local tax, sales tax etc. And these deductions are not allowed under AMT.
The taxpayer can take advantage if he/she is residing in such state where the local taxes are high. The following itemized deductions are available for regular tax planning for the amounts expended during the prescribed year. Medical and Dental Expenses The taxpayer is eligible to deduct expenses if the amount is paid for medical care for self, spouse or other dependents. Such deduction is allowed for the prevention or alleviation of physical/mental defect or illness. The expenses include payments for diagnosis, cure, mitigation, treatment etc. The expenditure is allowed for the drugs that are prescribed.
However the deduction is not available for insulin. The eligible amount of itemized deduction in this regard is 7. 5% of adjusted gross income. The medical expenses include insurance premiums paid for accident and health or qualified long term care insurance. Deductible taxes The taxpayer eligible for deduction nonbusiness taxes like State, local and foreign income taxes, Real estate taxes, Personal property taxes and State and local sales taxes. In order to get this deduction, the tax is imposed on the taxpayer and subsequently paid by such person during current tax year. Home Mortgage Points
The taxpayer eligible for certain charges paid in connection with home mortgage. It is described as ‘points’ that are linked with home mortgage. So any amount paid in connection with home mortgage can be taken as deduction. Interest expense Any interest paid in connection the borrowed money eligible for deduction. But the debt should be legally acceptable. But interest is not acceptable on such items like on rental, business property, student loan etc. because such interests can be claimed on separate itemized deductions. For example Student loan interest eligible under Topic 456.
Contributions
Any contributions to charitable institutions are eligible for deduction. But such contributions must be made to qualified organizations that are mentioned in publication 561. Causality and theft losses In a normal, the taxpayers are eligible to deduct their losses with respect of home, household items or vehicle through Federal income tax return. But in the head of Causality and Theft losses, still also eligible to claim deduction provided the taxpayer should submit timely claim for reimbursement. The expression of causality does not indicate normal wear and tear.
The causality must be caused by sudden or unexpected which resulted the damage to the property. For example car accident, fire, flood, vandalism etc.
Miscellaneous expenses
Some of miscellaneous expenses also eligible for deduction but limited 2% only. The preferred expenses are unreimbursed employee expenses, tax preparation fees and other expenses. Such deduction is limited to 2% of the adjusted gross income of the total amount of deductions.
Business Use of Home
All the persons whether self-employed or employee eligible for deduction of expenses that are related the home which is used for the business purpose.
The expenses include real estate taxes, deductible mortgage interest, rent, utilities, insurance, depreciation, repairs etc. however the deduction is not eligible for expenditure like lawn care etc. Business use of car If the car is engaged for the job or business, then the taxpayer is eligible for deduction of expenses. The expenses are limited to only for the car used for the business purposes.
Business Travel expenses
The travel expenses are eligible for deduction. The employee can claim for deduction. The travel expenses paid in connection with temporary work assignment are deductible.
The travel expenses that are linked with indefinite work assignment are not deductible. The work assignment is more than one year will be described as indefinite assignment. The travel expenses include meals and lodging.
Business Entertainment Expenses
The entertainment expenses that are related to trade or business are allowed for deduction subject to two tests. Only 50% of food and beverage and entertainment expenses are allowed. The records must indicate business purpose and the expenses must show the date of lace of entertainment, business relationship etc
Education Expenses
The employees who are imparting education that improves job performance can expend and take deduction under the itemized head of Educational Expenses. Employee Business Expenses The employees also eligible for work related expenses and these are deductible. The commuting costs are not deductible. The local transportation expenses which are ordinary and necessary expenses that are linked with the work place are eligible. Besides business entertainment expenses and business gift expenses also deductible but subject to limitations. Causality, disaster and theft losses
The losses to the property that are resulted from sudden and unexpected incidents are eligible for deduction. Such damage or loss must have been caused by the unusual incidents like hurricane, tornado, fire etc.
AMT Credit
The AMT liability can be fulfilled only after payment of tax. However a portion of the AMT liability can get back by way of refund in case of excess of payment. So the person can get AMT credit if the AMT has been paid in relevant previous year. The claim of AMT credit is possible in the case of incentive stock option or certain items i. e. timing items but limited to exemptions, itemized deductions of state or local etc.
Conclusion
The taxpayers must decide to use standard deduction or itemized deductions. It is better to select the itemized deductions if allowed itemized deductions are more than the standard deduction. Besides some taxpayers may not qualify for standard deduction, hence the supposed to select itemized deductions. For example non resident aliens, dual status aliens or individuals who fire returns for a period of less than 12 months are not eligibility for standard deduction. In case of married couple, if one spouse filed return with .
