Alternative Minimum Tax of Individuals

“The AMT applies to taxpayers who have certain types of income that receive favorable treatment, or who qualify for certain deductions, under the tax law. These tax benefits can significantly reduce the regular tax of some taxpayers with higher economic incomes. The AMT sets a limit on the amount these benefits can be used to reduce total tax.”

…IRS Instructions for Form 6251

To accomplish this goal, taxpayers are required to compute two tax liabilities, regular tax and Alternative Minimum Tax (AMT). Moreover, taxpayers are required to pay AMT to the extent that AMT exceeds their regular tax liability.  In AMT, the use of certain exclusions, deductions, and credits that reduce regular tax are not allowed. A better name for Alternative Minimum tax (AMT) is Mandatory Maximum Tax.  Taxpayers have no choice but to pay the higher tax.

AMT and related planning has changed dramatically since its inception. Prior to 1987, optimal planning for AMT consisted of equalizing regular tax and AMT.  The 1986 Act added AMT credits and AMT basis adjustments which brought more fairness to the system.  However, the price of this fairness is a level of complexity that has turned AMT planning into a nightmare.  The complexity coupled with the fact that AMT is not indexed for inflation, makes it a target for change.

In her annual report to Congress in January 2007, National Taxpayer Advocate Nina E. Olson designated AMT as the most serious problem facing taxpayers both in its own right and because it symbolizes the broader problem of tax-law complexity.  In the absence of AMT relief, estimates of taxpayers subject to AMT in 2007 ranged from 20-25 million (up from 3.5 million in 2006).

After a bitter battle over whether temporary AMT relief for 2007 should be paid for with other revenue raising provisions, the Tax Prevention Act of 2007 (AMT Patch) passed both chambers and was signed into law on December 26, 2007, without offsets.

Provisions of the Tax Prevention Act of 2007 impact the AMT exemption and credits allowable against AMT and are discussed later in this material.  All examples reflect these last minute changes to 2007 AMT calculations.

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