The Education Master 1994 (4th Edition)/EDUCATIONS_MASTER_4TH_EDITION.bin/files/legaegal/sba1/f1sba.exe/F102.SBE

Text File | 1993-04-01 | 6KB | 132 lines

@110 CHAP ZZ

               ┌─────────────────────────────────┐
               │     ALTERNATIVE MINIMUM TAX     │
               └─────────────────────────────────┘

Since the maximum individual and corporate tax rates were
reduced to 28% and 34% (theoretically), respectively, in
1988, many people mistakenly believe that tax planning is
no longer that important a part of personal and business
tax planning.  For many taxpayers, this is not the case.
In fact, the much narrower differential between the regular
tax rate and the Alternative Minimum Tax rate (of 24% for
individuals and 20% for corporations) than existed under
prior law now makes the Alternative Minimum Tax ("AMT") a
potential trap for many unwary taxpayers.  To avoid the AMT
will often require much more complex and detailed tax
planning than was necessary before the 1986 Tax Reform Act
changes.

Like the old version of the AMT, the current version is, in
effect, an alternative tax system that exists alongside the
regular income tax, complete with different (more restric-
tive) rules as to what is taxable, what is deductible, and
a different (slower) set of depreciation schedules.  Each
year, a taxpayer must compute taxable income under the reg-
ular and AMT systems, apply the different tax rates and
exemptions to each, and if the AMT is greater than the reg-
ular tax, the taxpayer must pay the higher amount.

The new AMT has much larger and sharper teeth in it than
its relatively tame pre-'86 Act predecessor, however.  The
new AMT tax rate is closer to the regular income tax rate,
which means that relatively minor differences in regular
taxable income and alternative minimum taxable income can
result in AMT being imposed.  The potential problem is ex-
acerbated by the fact that the AMT exemption of $40,000 is
phased out at income levels above $150,000 for corporations
and individuals filing joint returns (the exemption is
$30,000 and begins phasing out at $112,500 for single in-
dividuals).  In addition, an increased number of deductions
are disallowed under the AMT.

Differences between regular taxable income and alternative
minimum taxable income are called "tax preferences."  How-
ever, not all preferences are created equal.  Some prefer-
ences, like itemized deductions, that permanently reduce
taxable income, are called "exclusion preferences."  Oth-
ers, such as accelerated depreciation deductions for regu-
lar tax purposes, result only in a deferral of a taxpayer's
tax liability and not a permanent tax reduction.  The
latter are called "deferral preferences."

To the extent you or your corporation ever incurs an AMT
liability on account of deferral preferences (but NOT ex-
clusion preferences--except in the case of a corporation),
the AMT that is paid may eventually become refundable in a
subsequent tax year when the timing differences reverse
themselves.  This is done by claiming an "alternative
minimum tax credit" in a subsequent year.  Thus planning
becomes extremely complex--not only do you want to minimize
or eliminate any potential AMT liability in a given tax
year, but (except for a C corporation) if you do have to
pay AMT you will want to try to structure your tax situa-
tion so that most or all of such AMT liability results from
deferral preferences, rather than exclusion preferences, so
that there will be a chance to recoup some or all of the
AMT via the AMT credit in a future year.

Conceptually, the AMT can be illustrated by the following
general outline (for a married couple filing a joint re-
turn):

        Regular taxable income (1991):    $  80,000

        Plus or minus various adjust-
        ments for deferral preferences
        (depreciation, etc.):               +10,000

        Plus various exclusion prefer-
        ences, such as state income tax,
        personal exemptions, and the
        excess of percentage depletion
        over cost:                          +55,000
                                           --------

                     AMT Income:           $145,000

                     Less: AMT Exemption    -40,000
                                           --------

                     AMT Taxable Income    $105,000
                                           ========

        Regular tax on $80,000 taxable income  =  $17,980

        Tax on AMT Taxable Income (at 24% rate)=  $25,200


    ┌────────────────────────────────────────────────────────┐
    │Since AMT tax of  $25,200 is $7,220 more than the reg-  │
    │ular income tax,  an AMT liability of $7,220  would be  │
    │added to the  regular income tax liability of  $17,980  │
    │in the above example.                                   │
    └────────────────────────────────────────────────────────┘

The AMT is humongously complex, so that for the layman, the
best advice we can give you is to seek help from a compet-
ent tax professional early enough in the tax year to try to
make the best of a potentially ugly tax situation involving
the AMT.  Waiting until the following April 15 to begin
your tax planning for the preceding tax year simply will
not suffice.  The AMT thus makes careful tax planning much
more important than many people would expect in this age of
relatively low income tax rates.

@CODE: CA
California also has its own, very similar, version of the
alternative minimum tax, but applied at an 8.5% tax rate.
Credits and preferences are somewhat different than federal.
The tax is computed on Schedule P of Form 540.

@CODE:OF
@CODE: LS
In @STATE, the rules on how to compute the AMT are
hidden in the Confidential State Regulations.  Failure to
properly compute the AMT is grounds for immediate liquida-
tion by the Secret Tax Police.

@CODE:OF