The Alternative Minimum Tax Trap

The Alternative Minimum Tax Trap, when the alternative minimum tax (AMT) system was introduced in the early 1980s, it was intended to prevent a small number of taxpayers with substantial economic income from completely avoiding federal income taxes through the use of exclusions, deductions, and credits. The idea was to have those taxpayers do a secondary tax computation and then pay the higher of their \”regular tax\” or the tax

determined under the AMT computation.

A Wider Reach

Today, the secondary tax computation concept remains largely in place. But the AM T\’s tentacles have reached far beyond the small group targeted by the original AMT legislation. Every year, millions of taxpayers who don\’t consider their tax situations at all unusual are surprised to find they owe the AMT. One reason: AMT exemptions are not inflation-indexed. Unless Congress raises them, as it has done in the past, the 2012 exemptions are:

  • $33,750 (unmarried)
  • $45,000 (married filing jointly)
  • $22,500 (married filing separately)

Not everyone receives the benefit of an AMT exemption because the exemption is phased out for taxpayers whose AMT income exceeds a threshold amount. AMT income is basically taxable income recalculated by taking mandated preferences and adjustments into account.

Among the taxpayers most likely to be affected by the AMT are individuals who live in high-tax areas, exercise company stock options, or have many dependents. Why? Deductions for dependency exemptions and state and local income and property taxes generally are not allowed for AMT purposes. And taxpayers who exercise incentive stock options generally must include the spread between the stock\’s fair market value on the exercise date and the exercise price in AMT income (but not in regular taxable income).

Reducing Your Exposure\"TheAlternativeMinimumTaxTrap1\"

If a tax projection indicates you could be subject to AMT in 2012, you may be able to take steps to reduce your exposure. For example, you might avoid prepaying property taxes or state and local income taxes. Or, if you invest in municipal bond funds, you might consider switching to funds that specifically generate AMT-exempt income. These funds sidestep investments in most private activity municipal bonds, since they pay interest that\’s includable in AMT income.

Of course, you won\’t want to make tax decisions without considering the effect on your overall financial strategies. We can help you review your specific circumstances and recommend appropriate actions if AMT is a concern.

Are Club Dues Deductible?

Your business probably has club memberships to several different organizations. Depending on the type of organization, you may be able to deduct the club dues.

Generally, dues paid to a social or recreational club, such as a country club, golf club, or athletic club, cannot be deducted. That doesn\’t mean you can\’t deduct the cost of otherwise allowable business entertainment at the club. For example, if you take a client to your country club for a lunch in which business also will be discussed, you can deduct 50% of the cost of the lunch as a business expense, assuming the expense is properly substantiated.

Dues paid for memberships in professional organizations, civic clubs, business leagues, or chambers of commerce are often fully deductible business expenses.

May 2012 Page 1

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