NFIB

April 15 is just around the corner – and many small-business owners will be hit with another tax this year.

Under the alternative minimum tax, taxpayers must calculate their taxes twice–once using standard IRS rules, deductions and credits, and once using the AMT rate–26 and 28 percent–and without the benefit of many common deductions and credits. Taxpayers must pay the higher of the two tax bills.

What is the alternative minimum tax?
The AMT was enacted in 1969 after it was discovered that 155 individuals whose adjusted gross income was more than $200,000 had not paid any federal income tax on their 1967 returns. Because it was never indexed for inflation, the AMT now hikes the tax bills of middle-class Americans – more every year.

Who does it affect?
Estimates show that close to 3 million taxpayers were subject to the AMT in 2004. This number is expected to jump to 21 million by 2006 and to 30 million in 2010 if the law is not changed.

According to the Congressional Budget Office, individuals making between $50,000 and $200,000 will be hardest hit by the AMT in upcoming years. Those who have children, or who live in areas with high property taxes, a state income tax or high housing values are particular vulnerable.

Though it was created to ensure wealthy citizens could not escape paying taxes, the AMT now regularly wipes out the deductions, credits and lower tax rates that are available under the regular income-tax system for many middle-class families–and many small-business owners.

What could cause you to be liable?
Figuring out if you have to pay the AMT can be confusing. Some tax deductions will reduce your regular income tax liability but not AMT liability, and therefore are considered AMT “triggers.” The following are some of the most common:

• Exemptions: When calculating AMT, you are not allowed to claim the standard exemptions you might receive for yourself, your spouse or your dependents. The more exemptions you claim, the more likely it is that you will end up paying the AMT.
• State and local taxes: Deductions you might claim for state and local tax, including property tax and state income tax, are not allowed under the AMT. If you live somewhere that state and local taxes are high, it’s more likely that you will be subject to the AMT.
• Mortgage interest: Unless you used your mortgage loan to buy, build or improve your home, the AMT will not permit a deduction.
• Medical, business and investment expenses: Although the AMT permits a medical expense deduction, it is more limited than what is allowed when filing your regular income tax. Expenses such as unreimbursed employee expenses and many investment expenses are not allowed under the AMT, either.
• Other deductions and credits: Certain itemized deductions are not allowed under the AMT, nor are many of the various credits that are permitted under the regular income-tax system. The more deductions and credits you claim on your regular income tax, the more likely you are to have to pay the AMT.
• Addition of certain income from incentive stock options: Incentive stock options are sometimes tax advantageous to the recipients. However, they can push you into AMT eligibility as well, dramatically increasing your income. In fact, if you exercise incentive stock options, the entire difference between the exercise and sales prices will be counted as regular income under the AMT.
• Changes in certain passive activity loss deductions: Those with real estate and other investments classified by the IRS as "passive" investments may find their investments trigger the AMT, and these deductions are treated differently under the AMT.

What you can do
To find out if you will have to file under the AMT, visit the IRS’ Web site or consult your tax professional.