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How You Can Avoid the AMT's Nasty Bite

As tax time approaches, we're looking at ways to minimize your 2007 tax bill. In previous installments, we've covered adjusting your withholding and maximizing contributions to retirement savings plans.

Now it's time to look at the federal alternative minimum tax, or AMT, which has become a bane of taxpayers.

The AMT was created to make sure that the wealthy pay taxes. It parallels the regular income tax; taxpayers whose AMT liability is greater than their regular tax liability pay the difference as AMT. That means they lose some popular -- and significant -- deductions, including the standard deduction and the deductions for mortgage interest as well as the state and local taxes you pay.

But unlike regular income tax, the AMT's brackets and exemptions have not been adjusted for inflation. As a result, each year more Americans owe the AMT.

In recent years, Congress has provided some AMT relief in tax legislation, much of it passed at the last minute. Lawmakers probably will do so again this year. But as the law stands right now, 23 million taxpayers face the prospect of paying the AMT -- more than 80% of them for the first time, according to the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution.

This year, if Congress doesn't take action, the Tax Policy Center estimates that about 90% of taxpayers with income between $200,000 and $500,000 will pay AMT. In addition, 60% of those with income between $500,000 and $1 million will be subject to AMT, as will 70% of those with income between $100,000 and $200,000.

The AMT can be triggered by high state and local tax payments -- watch out, residents of New York, New Jersey and California -- large capital gains relative to other income or, believe it or not, a large family. So if you're facing any combination of those issues, there's a good chance you should take action to minimize the AMT's impact.

You can get a more precise idea of your AMT liability with H&R Block's free AMT calculator.

Unfortunately, planning for the AMT is a complex business. "It's like standing on your head," says Tom Scanlon, a CPA and certified financial planner at Borgida & Company, P.C., in Manchester, Conn. "Typically in tax planning we talk about deferring income and accelerating deductions. But for AMT purposes, you take the income and defer the deductions in order to lower your liability."

If you're at risk for AMT, you might, for example, consider pushing any real estate tax payments due at year-end into 2008. Other tactics include taking prepayment of your salary or bonuses and deferring payment of employee business expenses.

Above all, if you suspect there's an AMT payment in your future, consult a really good tax professional. You definitely don't want to end up on the wrong side of the IRS on this one.

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