The Alternative Minimum Tax

The alternative minimum tax taxes high income individuals who previously had been able to shelter portions of their income from taxation.

Alternative Minimum Tax Liability
The alternative minimum tax was born more than three decades ago to tax high income individuals who previously had been able to shelter portions of their income from taxation. It did this by nullifying many exemptions, deductions, and credits that taxpayers had used in the past. Today, more and more Americans are finding they are liable for this tax. Typically, taxpayers who may be subject to alternative minimum tax calculate their taxes two ways - one tax calculation for regular taxes and the other for AMT.

After the regular tax has been calculated, you need to compute the alternative minimum tax income. Once AMT income is calculated, a taxpayer is permitted to reduce that income by a so-called “exemption amount” before calculating the tax due. Congress has raised the AMT exemption to $62,550 for joint filers and surviving spouses, $42,500 for individuals and $31,274 for married couples filing separately for 2006. From this figure, you can calculate the AMT tax liability. Of course, the higher of the regular income tax or AMT must be paid.

Certain Municipal Bonds and Mutual Funds are Not Exempt From the AMT
If you invest in bonds that aren't exempt under the alternative minimum tax, you're a candidate for AMT liability. This can also be true for certain mutual funds. Many mutual funds that provide tax exempt interest invest at least some of their money in bonds that are not exempt under the AMT. Their annual statements tell the investor how much of the exempt interest dividend they received during the year is taxable under AMT.

Municipal AMT bonds still retain their state and local tax exemption as long as the investor purchases bonds from states in which they reside.

All of the above contains material that is believed to be accurate. However, Federal tax laws are complex and subject to change. Neither David Lerner Associates nor its employees give legal or tax advice. Investors should consult their attorney or tax advisor before acting on any tax advice.

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