Don't get bitten by this Awfully Mean Tax

By Jeff Schnepper

Just when you thought you've done your tax planning and you’re ready to start doing your return, I urge you -- no, beg you -- to take a hard look at the Alternative Minimum Tax.

It may cost you more on your 2008 tax return. It could cost you on your 2009 return as a growing number of us get sucked into it just for buying a new home or having another child.

The AMT (which I think should be renamed the Awfully Mean Tax) is an alternative tax computation that disallows your personal exemptions and many of your deductions. After allowing a given AMT exemption, the balance is subject to a flat 26% or 28% rate. You use Form 6251 (.pdf download) to do the computation.

The AMT is tricky and can cause you all sorts of trouble.

In recent years, Congress has voted to reduce -- but not eliminate -- the potential of having to deal with the AMT. This year, the extension was part of the bailout bill for the nation's banking sytem.

The AMT exemption for 2008 is $69,950 for joint returns ($34,975 for married couples filing separately) and $46,200 on single returns. That is an increase over 2007 and the result of furious lobbying that went all the way to Christmas. That means if your taxable income (plus some adjustments) is less than these amounts, you're not subject to the tax.

It's 2009 that you should start to think about, because the extension not include extending these higher exemptions beyond 2008.

So, the exemption for joint returns will drop to $45,000 and drop to $35,750 for single returns. Obviously, Congress will be under pressure to extend the larger exemption amounts into 2009 and later.

Some 19 million taxpayers might have been to the AMT had the extension not been passed. Some 5 million taxpayers will be affected by it regardless. Whether it's going to hit you depends on your particular tax and financial position, and on where you live.

So, here are some of the pitfalls to watch for and tips on how to organize your finances to minimize your odds of being slammed with the AMT, and what to do if this tax tsunami washes away your refund.

Who gets hit

You may get hit if:

• You live in one of those states without a state income tax. Sorry, but it may be time to come down to earth and wipe that smile off your face. In the name of tax equity and fairness, Congress has resurrected the deduction for sales taxes. You can now deduct the higher of your state and local income taxes, or the sales tax you paid during the year. But, these taxes you pay and deduct are included in what the tax pros call AMT preferences. That means they're not allowed as deductions for the computation of the AMT.

• You live in a state with high state and local taxes, including income, property, personal property and, yes, sales taxes. Nearly half the people paying the alternative minimum tax in 2005 lived in California, Connecticut, the District of Columbia, Maryland, Massachusetts, New York or New Jersey. High property taxes -- they can be $10,000 or on in parts of New York and New Jersey -- can easily trigger the AMT.

• You have a large family. I have a client with eight children who's hit by the AMT every year. That's because he loses 10 personal exemptions in the AMT calculation. Back in 2004, that was like increasing his taxable income by $31,000.

Continued: What to do

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