Planning for the AMT.

Facts: Jesse White, an individual taxpayer, owns his own home, has a boat, and occasionally goes to Las Vegas (even though luck isn't always on his side). He has heard about the alternative minimum tax (AMT) and consults his tax adviser about the ramifications of his situation. Issue: What tax advice concerning the AMT can Jesse's tax practitioner give him?

Analysis

Individuals are subject to two income tax systems: the regular income tax and the AMT. Taxpayers must compute their tax under each of the systems and pay the greater of the two amounts. AMT is calculated by applying a two-tier graduated rate structure to alternative minimum taxable income (AMTI). The rates are 26% on net AMTI up to $175,000 ($87,500 for married filing separately) and 28% on net AMTI above that amount. Each taxpayer is allowed an exemption amount in arriving at AMTI.

* AMTI calculations: In computing AMTI, certain AMT "adjustment items" and "preference items" must be considered. Although these terms are sometimes used interchangeably, there are some differences. Adjustment items, which are generally described in Sec. 56, usually require separate AMT computations and are substituted for the amounts computed for regular tax purposes. These can result in either positive or negative adjustments to regular taxable income. Preference items are described in Sec. 57 and result in amounts added back to regular taxable income because of the "preferential" treatment the items receive for regular tax purposes. Tax preference items cannot be negative amounts.

* Other considerations: Taxpayers subject to AMT must also consider the minimum tax credit (MTC) allowed for certain deferral (or timing) adjustments and the alternative minimum tax net operating loss (AMT NOL). The MTC prevents the double taxation of income and the disallowance of deductions inherent in the relationship between the regular tax structure and AMT structure. An AMT NOL equals the regular tax NOL modified by AMT adjustments and reduced by items of tax preference, but only to the extent the preference items are included in the regular NOL (Sec. 56(d)(2)).

Obviously, the AMT has complicated tax return preparation. While all practitioners are presumably familiar with the AMT, there are still traps lurking in the AMT Code sections. For individuals, the AMT traps usually involve itemized deduction rules and basis adjustments, although depreciation and certain income recognition rules offer their own complexities.

Because of Mr. White's situation, his practitioner suggests that he look at the itemized deduction traps on gambling losses and home interest expenses in items I.A-C on the AMT Checklist for Individual Returns (see next page). The checklist includes other AMT traps that practitioners should watch out for as well.