Planning for the AMT.

• Author: Ellentuck, Albert B.
• Position: Alternative minimum tax

Facts: Jesse White, an individual taxpayer, owns his own home, has a boat, and occasionally goes to Las Vegas (even though luck isn't always on his side). He has heard about the alternative minimum tax (AMT) and consults his tax adviser about the ramifications of his situation. Issue: What tax advice concerning the AMT can Jesse's tax practitioner give him?

Analysis

Individuals are subject to two income tax systems: the regular income tax and the AMT. Taxpayers must compute their tax under each of the systems and pay the greater of the two amounts. AMT is calculated by applying a two-tier graduated rate structure to alternative minimum taxable income (AMTI). The rates are 26% on net AMTI up to $175,000 ($87,500 for married filing separately) and 28% on net AMTI above that amount. Each taxpayer is allowed an exemption amount in arriving at AMTI.

* AMTI calculations: In computing AMTI, certain AMT "adjustment items" and "preference items" must be considered. Although these terms are sometimes used interchangeably, there are some differences. Adjustment items, which are generally described in Sec. 56, usually require separate AMT computations and are substituted for the amounts computed for regular tax purposes. These can result in either positive or negative adjustments to regular taxable income. Preference items are described in Sec. 57 and result in amounts added back to regular taxable income because of the "preferential" treatment the items receive for regular tax purposes. Tax preference items cannot be negative...