ALTERNATIVE MINIMUM TAX

- WHAT IS IT -

- HOW TO REDUCE IT- 

AMT CALCULATION

AMT REDUCTION

The final tax due is the larger of that calculated under both sets of rules.

To estimate your AMT liability, tax these steps...

• Start with your tax return for 200 that you filed last April (or that you may still be preparing on extension). Adjust the numbers on it for 2001 using your best estimates. Add to this number....
  • The deduction for state and local income and property taxes
  • Miscellaneous itemized deductions
  • The "bargain element" of all ISOs you expect to acquire - that is, the amount by which the value of the stock acquired (not sold) exceeds the price you pay for it
  • The amount by which deductions for accelerated depreciation that you expect to claim exceed what straight-line depreciation would be on the same assets.

  The resulting number is your AMT income (AMTI).
  

• Subtract your AMT exemption. You initially are entitled to an AMT exemption of $49,000 on a joint return or $35,750 on a single return.

  The new tax law increased these numbers from $45,000 on a joint return and $33,750 on a single return. This is the extent of the AMT tax relief provided by the new law. But this increase in the exemption expires in 2004.
  

• If your AMTI, as calculated above, exceeds $150,000 on a joint return or $75,000 on a single return, reduce your exemptions by 25% of the excess. This phase-out leaves no exemption when AMTI exceeds $346,000 on a joint return and $218,000 on a single return, and a reduced exemption when AMTI is at intermediate levels.
  
• Apply the higher AMT tax rate - a flat 28% - to the balance of AMTI. The result is our estimated AMT (actual AMT is based on both 26% and 28% rates)
  
• Project your regular income tax under normal rules. If your estimated AMT is larger, you will owe it instead. If smaller, you owe your normal tax amount.

WHAT TO DO

If you expect to owe AMT for 2001 - or be close to doing so - have an expert review your AMT situation. With planning, it may be possible to take steps to avoid or reduct AMT. Below are a few examples.

1. If AMT is caused by excessive State and Local Tax deductions, and these payments are made via quarterly estimates, make sure you pay your fourth quarter state and local estimates in January of the following year instead of December of the current year.
2. Employees who own ISOs can minimize the AMT they owe by planning the number of options they exercise, and the timing of the exercise. They may also defer incuring deductible employee business expenses until the next year - instead of the typical practice of accelerating them into the current year (miscellaneous itemized deductions).
3. Owners of pass-through business entities can plan to minimize AMT. Instead of placing new equipment in service by December 31st to get the accelerated depreciation deduction, wait until January 1 of the next year, thus reducing accelerated depreciation.

For more details on how to reduce the AMT impact, consult your accountant or tax preparer, or the AMT experts at Maxwell Shmerler & Co.