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(Continued from previous article) The exemption amounts that are applicable to the alternative minimum tax, have, of course, already been listed, but before we could properly move on to discuss the other components of the alternative minimum tax system, we still have another issue to tackle with regards to exemptions applicable to the alternative minimum tax, and that would be the “phase out of the exemption amount”.

The alternative minimum phaseout exemption amount states that the exemption of any taxpayer decreases by twenty-five percent (that is, twenty-five cents per dollar) of the excess over certain amounts by means of the minimum taxable income of the taxpayer. That is to say, corporations or individuals filing a joint return as well as surviving husbands or wives whose alternative minimum taxable income exceeds one hundred and fifty thousand US dollars shall have their exemptions reduced to twenty five percent of the excess. The same is true and applicable to single individuals or individuals who are not surviving husbands or wives whose alternative minimum taxable income exceeds one hundred and twelve thousand and five hundred dollars and married individuals filing separate tax returns or trusts whose alternative minimum taxable income is more than seventy-five thousand American dollars.

Having mentioned, that we can move on to discuss the tentative minimum tax. Once you have calculated your alternative minimum tax taxable income, you will then apply your twenty-six or twenty-eight rate schedule so you can arrive at your tentative minimum tax. Once you arrive at your tentative minimum tax, it should be compared to the regular income tax that you have calculated. Again, if your regular income tax happens to be less or smaller than the tentative minimum tax, then the excess of the tentative minimum tax is added to the usual tax amount that you have to pay – meaning you have to pay for the entire tentative minimum tax. However, if (and only IF) your tentative tax fails to exceed your regular tax, then that means that you would be exempted from paying the entire tentative minimum tax and would instead be expected to pay the regular tax instead. In a way, one can think of the tentative minimum tax as a combination of the regular tax and the alternative minimum tax (that is, a the regular tax enhanced by a special additional tax). But one thing is for certain here – the higher value in this case is most definitely favored as the amount to be paid.

Having said that, we can now continue to discuss the effective marginal rates in the alternative minimum tax system, and for that we have to take up the alternative minimum tax exemptions with a little more detail. It was said that in 2007, the alternative minimum tax exemption would not be fully phased out until the alternative minimum tax taxable income is in excess of four hundred and fifteen thousand dollars worth of joint returns. That being said, the true marginal federal tax rates for taxpayers expected to pay AMT are as follows: in the one hundred and fifty thousand to four hundred and fifteen thousand range, the tentative minimum tax rates of twenty-six percent and twenty-eight percent are multiplied by one point twenty-five (so they would be thirty-two point five percent and thirty five percent respectively), meaning that the tentative minimum tax rate for capital gains would be twenty-one point five percent or twenty-two percent (instead of the standard fifteen percent) because, again, twenty-five percent of each excess dollar of ordinary income will be taxed at twenty-six or twenty-eight percent. Take note that the rates of the tentative minimum tax is higher in the lower income range compared to regular tax rates. What all of this means (in summary) is that liability in the alternative minimum tax system – that is, the excess of the tentative minimum tax over the regular tax – rises in accordance with your income’s climb above one hundred and fifty thousand dollars.

It should be mentioned, briefly, that state income tax is never deductible under the tentative minimum tax; and considering the aforementioned higher tax rate and the steeper tax liability, this makes for some increased tension with regards to the feelings of the public in relation to this tax. Other problems that taxpayers have with this particular tax system shall be further discussed later. For now, let’s look, very briefly at the last two elements of the structure of the alternative minimum tax system: the AMT carry-forward credit and the adjusted current earnings.

When it comes to things like the carry-forward losses, the carry-forward passive losses the carry-forward tax credits and the carry-forward cost basis in the alternative minimum tax system, one should remember that again, this system has a very different way of handling these eventualities. But before we can fully understand that, we have to understand how basis assets work in the alternative minimum tax system.

To be sure, assets like real property and stocks help you figure out how much profit or loss you have to report once you have relinquished it (that is, once you have sold it). Assets, when used in this manner, are called basis assets. Usually, assets have one or a singular basis in the regular income tax system. In this case, your asset’s basis relies on the cost you had to shell out in buying it added to additional costs in your quest for acquiring it (the best example of this would be brokerage fees). However, when the alternative minimum tax comes into play, one will find that the asset would have a completely different basis (and often, the basis is higher for the alternative minimum tax), turning the asset into a dual basis asset whose bases serve different purposes. So in effect, any gains and losses determined on the alternative minimum tax system would be distinct from the gains and losses under the regular tax.

So what makes the difference between the asset basis of the alternative minimum tax and the regular tax? As was mentioned before, the regular tax basis relies on the cost you had to shell out to BUY the asset and amount you had to pay in order to acquire it. This is not, however, definitive – the basis of the asset is subject to adjustment such as deductions in the event of value depreciation and the like. Under the regular tax system the deduction applied to the basis of the asset serves to reduce the basis of that asset by the value deducted. But the alternative minimum tax works very differently in cases such as this – under the alternative minimum tax system, you have to use a different (and more troublesome) depreciation schedule for your deductions. What this means is that you have LESS deductions for the asset with alternative minimum tax than with the regular tax, thus explaining why more often than not, the basis of the alternative minimum tax is much higher than that of the regular tax.

In terms of credit, what this means is that selling your dual basis asset whose alternative minimum tax basis is higher than that of the regular tax will garner you a negative adjustment – the negative adjustment can be used to increase the usable alternative minimum tax credit instead of simply lowering the amount of tax to be paid.

That being explained, the alternative minimum tax credit sort of works like this: the part of the tentative minimum tax that we consider to be the alternative minimum tax is carried forward so that in the future, it may be used as a minimum tax credit, which may reduce the amount of regular income tax you may have to pay while at the same time not allowing one to pay less than the tentative minimum tax to be paid for those same years. Provided that you keep the value of your regular income tax above the tentative minimum tax (even with the minimum tax credit), you WILL be able to reduce the total amount of taxes that you owe the federal government. The tax credits, like all credits, are of course subject to diminishing, and it should be pointed out that credits garnered from the alternative minimum tax have in some ways become a popular means of lowering tax dues.

Finally, we have the adjusted current earnings wherein certain items that are considered income, deductions, credits and the like are defined and therefore treated in a vastly different manner under the alternative minimum tax system compared to that of the regular income tax system. The best example of this, unfortunately applies to that of corporate alternative minimum tax and not of personal minimum tax – but as we are about to move on to discuss the alternative minimum tax as applied to corporations anyway, we may as well use the example. Examples of how the alternative minimum tax treats income, credits and deductions differently from regular tax would be the “running balance” of a corporation’s excess increases (in total) in alternative minimum tax taxable income from the year previous, adjusted earnings at present (also known as adjusted current earnings), and adjustments over the total reductions in the alternative minimum tax taxable income from the previous year’s adjustments. (To be continued in next article)