In our prior quarterly newsletter, we commented on the prevalence of the Alternative Minimum Tax or AMT, and pointed out that for many middle and upper income individuals, it is becoming the predominant tax.
Now, the recent May legislation has provided a small bit of temporary relief for 2006, increasing the exemption that is used in calculating AMT. For joint filers, the AMT exemption increases from $58,000 to $62,550, while for single filers the former exemption of $40,250 becomes $42,500.
So is this modest exemption increase enough to make a difference in your 2006 Form 1040? The AMT is an alternative system, and a taxpayer is required to pay the greater of the regular tax calculation or the AMT result. Here is a simple example of the regular tax versus AMT at $250,000 of joint adjusted gross income, assuming two personal exemptions (husband and wife) and using the standard deduction:
| 2006 regular tax | $57,195 |
| 2006 AMT (old exemption) | 57,260 |
| 2006 AMT (new exemption) | 55,986 |
Before Congress increased the exemption, this taxpayer would have paid the greater of regular tax or AMT ($57,260). With the AMT exemption improved, the regular tax is greater, and no AMT occurs.
But this illustration assumed a standard deduction. If, more realistically, the taxpayer has state income and property tax deductions, those expenses reduce regular tax but are not allowed for the AMT system. As little as $14,000 of state income tax, property tax, or other disallowed AMT expenses in 2006 would trip the line where AMT was the greater tax, despite the improved exemption.
In summary, this modest improvement in the AMT exemption has essentially just kept pace with the inflation-indexing of the regular tax brackets. Most middle and upper income taxpayers will continue to find that the AMT closely approximates or exceeds their regular tax. This has the effect of disallowing the benefit of those state and local tax deductions. But it also negates any benefit from deductions such as your personal exemptions, the new hybrid vehicle energy credit, and employee business expenses. Please let us know if we can assist in assessing your AMT risk and discussing strategies that may be of benefit.
