So what’s all the fuss about AMT?
Add comment January 14th, 2008
Tawn M. Jacobs, MST, CPA, CFP®
Finally, in the last week of the year, Congress boosted the alternative minimum tax (AMT) exemption amounts for 2007. So what? The significance of this may not be felt by many taxpayers who haven’t fallen into the AMT trap yet, but were headed blindly into the abyss. A little background will help explain this phenomenon.
The technical definition of AMT is as follows:
“The alternative minimum tax (AMT) is the excess, if any, of the tentative minimum tax for the year over the regular tax for the year. In arriving at the tentative minimum tax, an individual begins with taxable income, modifies it with various adjustments and preferences, and then subtracts an exemption amount (which phases out at higher income levels). The result is alternative minimum taxable income (AMTI), which is subject to an AMT tax rate of 26% or 28%”.
Again, so what does that mean? In a nutshell it means that the IRS has two tax systems, a regular tax and an alternative minimum tax. The AMT was suppose to tax the “rich.” However, in recent years, it seems that it is hitting more and more middle class taxpayers who definitely do not consider themselves rich. So what is the exemption change?
Prior to the new law, an individual’s AMT exemption amounts for 2007 (before the phase-out) were $45,000 for married individuals filing jointly (MFJ) and $33,750 for single taxpayers. (Note: these were the amounts in effect for 2000). Under the new law, the exemption amounts are $66,250 for MFJ and $44,350 for single taxpayers. This may not seem like such a big deal, but this increase in the exemption will keep thousands of unsuspecting taxpayers out of the throes of AMT. This is the second year in a row that Congress has acted during the year to adjust the exemption amount up.
Beware. This is a temporary fix only. Absent Congressional action, the 2008 AMT exemption amounts for individuals will revert to the levels they were at for 2000.
