Many will escape AMT for added year

Published May 21, 2006

When her clients get hit with the alternative minimum tax, St. Petersburg CPA Celia Hall says some of them respond: "I don't want that alternative."

Unfortunately for them, the AMT isn't optional. If your income tax calculated under the AMT is higher than the tax calculated the regular way, you pay the AMT amount. More than 3-million people paid the tax last tax year and an additional 15-million would have been affected in 2006 if Congress hadn't stepped in this month to save their wallets.

Although it was enacted to make sure millionaires pay taxes, the AMT is most likely to apply to taxpayers with incomes between $200,000 and $500,000. People with lower incomes can be affected.

Deloitte Tax LLP calculated that a hypothetical family of four with an income of $185,000 and itemized deductions of about $33,000 would have paid an extra $3,700 in AMT this year without congressional action.

Congress took notice, and if you didn't pay the AMT last year, you won't this year unless your circumstances change. However, the fix is good only for a year, so you haven't heard the last of this topic.

The underlying problem is that taxpayers' incomes have risen more than the AMT exemption - the AMT version of the standard deduction. As a result, the AMT snares more people every year. For 2006, anyone with income higher than that exemption - $42,500 single or $62,550 (married filing jointly) - becomes a potential AMT candidate.

When calculating tax under AMT, you lose personal exemptions and certain itemized deductions, including those for taxes and medical expenses. Floridians are less affected than residents of most states because they don't have a state income tax to deduct on their federal returns. But Tampa CPA Greg Rosica said they can get caught when they pay high real estate taxes or have partnerships that pay taxes in other states. In addition, under AMT, the formerly tax-free interest on certain types of municipal bonds becomes taxable.

Even though the AMT has two tax rates - 26 or 28 percent - it can result in a higher tax as deductions, credits and exemptions are disallowed. For 2006, AMT payers will be allowed to hang on to certain nonrefundable credits such as the Hope Credit for college expenses and the dependent care credit for their 2006 taxes.

The best way to avoid AMT problems is to work with a tax adviser well before the end of the year. You may be able to move income or expenses from one tax year to the other to avoid or delay having to pay the AMT, said Clearwater financial planner Ray Ferrara.

"A lot of people are able to control timing, particularly with regard to capital gains," he said. Spreading the extra income over two or three years or taking offsetting losses may avoid the AMT, he said.

The reason the AMT is still around is that it's a significant source of revenue. By some estimates, eliminating the tax would cost $1-trillion over the next decade. Finding a replacement for that much money is a daunting challenge.

I read about Royal Palm Insurance Co. taking over 120,000 policies from Allstate. Will they write new policies? I need to find coverage.

The company plans to write new coverage, but not until November. Application will be through Allstate agents.

Student loan reminder

The deadline to consolidate student loans at this year's interest rates is approaching quickly. Rates are expected to increase about 2 percentage points July 1.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to hhuntley@sptimes.com to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or log onto www.sptimes.com/blogs/money where you also can see other questions and answers.