Alternative minimum taxable income Essay Example for Free

Alternative minimum taxable income Essay In 1969, Congress had noticed that 155 people with high incomes were legally using so many deductions and other tax breaks that they were virtually paying nothing in federal income taxes. This angered many tax paying citizens and embarrassed the government. In an effort to fix the system Congress came up with the alternative minimum tax. At the time the tax only affected the high income class but not so today. The alternative minimum tax was never adjusted for inflation and now affects more and more middle income taxpayers. Now a day the AMT affects people with an income over $75,000 and some large deductions. Most vulnerable are taxpayers with several children, interest deductions due to second mortgage, capital gains, and incentive stock options. The question I know you may be having is if you will be subject to the alternative minimum tax. A simple way to see if you are subject to paying AMT or how close you are to paying it. We can look at your Form 6251 from last year. We can compare the tentative minimum tax to your regular tax. Your change in income can leave you with an AMT liability. It could be because of a big item on your tax return or a lot of small items that would make you pay AMT. One of the best ways to understand the alternative minimum tax it to look at it as a separate tax system. This system has its own set of tax rates and its own rules for deductions. Let me explain how the AMT works. The AMT is reduced by an exemption amount to arrive at net alternative minimum taxable income. This income is then multiplied by 26% or 28% alternative minimum tax rate. If your income was to exceed $175,000 it will be subject the 28%. The first alternative minimum tax income of $175,000 will be subject to 26% tax rate. These rates are for individual returns. Corporations figure their tax under the regular system, which taxes corporate profits at a top rate of 35 percent. Then they figure it under the AMT system, which tosses out some deductions allowed under the regular system, and taxes the resulting profit at 20 percent. The corporation then pays whichever tax is higher. This amount then can be reduced by the alternative minimum tax foreign tax credit for the taxable year. For the last few years Congress has approved of temporary patches to increase the amount of income exempt from the AMT. Many AMT adjustments apply to businesses operated by individuals or corporations. The adjustments tend to have the effect of deferring certain deductions or recognizing income sooner. Depreciation deductions must be computed using the straight line method and longer lives than may be used for regular tax. (See MACRS) Deductions for certain preferences are limited. These include deductions related to circulation costs, mining costs, research and experimentation costs, intangible drilling costs, and certain amortization. Certain income must be recognized earlier like long term contracts and installment sales. Corporations are also subject to an adjustment (up or down) for adjusted current earnings. In addition, a partner or shareholders share of AMT income and adjustments flow through to the partner or shareholder from the partnership or S corporation. There is a light at the end of the tunnel. A corporation does get an exemption amount, which means that they can deduct $40,000. Furthermore, small corporations with average annual gross receipts less than $7,500,000 for the prior three years are exempt from AMT, but only so long as they continue to meet this test. â€Å"The tentative minimum tax of a corporation shall be zero for any taxable year if the corporation’s average annual gross receipts for all 3 taxable year periods ending before do not exceed $7,500,000.† (26 USC  § 55) If such taxable year is the first taxable year that such corporation is in existence, the tentative minimum tax of such corporation for such year shall be zero. Other than this Congress did a good job of making this tax difficult to avoid. The alternative minimum tax is a powerful and complicated tax system that is not easily avoidable. It was specifically made to not be avoided and to make up for the loopholes in the system. Given the company’s revenues exceeding $12,000,000 you can expect some form of alternative minimum tax. The best bet is to minimize the effect it has on you be being prepared. That means tax planning is essential in reducing or even avoiding AMT liability. I recommend we sit down and go thru all the different sections of AMT and look where we can maximize your deductions or how we can prepare you for future deductions.