As you know, the alternative minimum tax (AMT) is trapping more middle income taxpayers every year. If government forecasts are correct, 31 million taxpayers will be paying AMT by 2010, many of them middle income taxpayers. With exemption amounts not indexed for inflation, and numerous credits not allowable for minimum tax purposes, with a tax rate of at least 26 percent imposed on AMT items, AMT exposure could be substantial. To partially alleviate these risks, Congress has enacted annual "patches" to the AMT to increase exemption amounts and provide other relief.

The Emergency Economic Stabilization Act of 2008 (2008 Stabilization Act) provides taxpayers with such relief for 2008 by (1) increasing the exemption amounts (to $69,950 for married couples filing jointly and surviving spouses, $46,200 for single taxpayers and heads of households, and $34,975 for married couples filing separately); (2) allowing nonrefundable personal credits to be used to reduce AMT liability and removing limits in the AMT on taking personal credits against regular tax liability; (3) permitting taxpayers to accelerate refunds of their unused minimum tax credit by allowing recovery in two years and by removing the income phaseout of the minimum tax credit; and (4) abating AMT, interest and penalty liability from the exercise of incentive stock options (ISOs) before 2008. Most of these changes are effective only for the 2008 tax year.

In general, the best way to handle AMT liability is careful planning involving the coordination of future regular income tax and AMT, using accurate projections of income, expenses, and deductions over multiple years with several alternative scenarios. An overall plan must then be devised to manage your AMT liability without raising regular tax liability.

Please contact our office if you would like to discuss how this will affect you.