Late AMT Reprieve for 2007 Filers
Congress creates another one-year patch
A tax law change enacted in the waning days of 2007 has saved a multitude of
taxpayers from a dire tax fate. The new tax legislation increases the
exemption amounts included in the complex alternative minimum tax (AMT)
calculation on 2007 returns. It is expected to protect approximately 19
million taxpayers from the AMT and reduce the tax bite for over 4 million
others.
Basic premise: The AMT runs on a separate track beside your regular tax liability. After you have figured out your regular taxable income, AMT liability is calculated using four basic steps:
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First, you must add certain tax preference items to your taxable income and make other technical adjustments required by law.
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Then you subtract the special exemption amount based on your filing status on your income tax return.
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Next, you apply the AMT rate to the net amount. For the 2007 tax year, the applicable rate is 26% on the first $175,000 of AMT income and 28% for amounts above $175,000.
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Finally, you compare your AMT liability with your regular tax liability. If the AMT amount is higher, you are required to pay the excess, in addition to your regular tax liability.
The list of preferences and technical adjustments is too long for the space allotted here. In brief, you are required to add back certain itemized deductions and personal exemptions. This is one reason why large numbers of taxpayers have become unsuspecting victims of the AMT. For instance, taxpayers who report high state income tax deductions are particularly vulnerable.
Ever since the monumental Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 was passed, Congress has tweaked the exemption amounts to account for inflation in a series of short extensions. The latest increase is effective only for the 2007 tax year. Unless subsequent legislation is enacted, the exemption amounts will return to the pre-EGTRRA levels. Thus, you could be facing similar challenges in 2008.
Under the new law, the exemption amount for joint filers in 2007 is $66,250 (up from $62,550). If you are a single filer, the exemption amount is $44,350 (up from $42,500). Finally, the amount for married couples filing separately is $33,125 (up from $31,275).
However, the benefit of these exemption amounts is reduced for certain high-income taxpayers. Each exemption is reduced by 25 cents for each dollar of AMT income over $150,000 for joint filers; $112,500 for single filers and heads of household; and $75,000 for married couples filing separately. These figures have not been adjusted in recent years.
Also, be aware that the change occurred too late for the IRS to include in its 2007 tax return packages. It will also take time for the IRS to reprogram its systems and make changes in all AMT-related forms. Consequently, the new law is expected to result in delays in processing refunds for certain taxpayers.
Reminder: This is an extremely complex area
of the tax law. It is recommended that you seek assistance from your
Somerset
CPAs tax advisor.
Wherewithal
is provided by Somerset for our clients and other interested persons
upon request. Since technical information is presented in generalized
fashion, no final conclusion on these topics should be made without
further review. For additional information on the issues, please
contact
a member of the firm. Somerset provides total financial solutions,
including accounting, assurance, information solutions, litigation &
valuation, tax, wealth management and management consulting services to
entrepreneurs and their businesses. This document is not intended or
written to be used, and cannot be used, for the purpose of avoiding tax
penalties that may be imposed on the taxpayer.
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P.C.
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Indianapolis, Indiana 46240
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