@110 CHAP ZZ 旼컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� � ALTERNATIVE MINIMUM TAX � 읕컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� 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 (1992): $ 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 = $17,746 Tax on AMT Taxable Income (at 24% rate)= $25,200 旼컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴커 쿞ince AMT tax of $25,200 is $7,454 more than the reg- � 퀅lar income tax, an AMT liability of $7,454 would be � 쿪dded to the regular income tax liability of $17,746 � 쿶n the above example. � 읕컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴켸 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