Will the Alternative Minimum Tax ‘patch’ save your skin? — Business Management Daily: Free Reports on Human Resources, Employment Law, Office Management, Office Communication, Office Technology and Small Business Tax Business Management Daily
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Will the Alternative Minimum Tax ‘patch’ save your skin?

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in Small Business Tax,Small Business Tax Deduction Strategies

At the last minute, Congress enacted an alternative minimum tax (AMT) “patch” for 2007 without generating any revenue to offset the lost tax income. The new Tax Increase Prevention Act of 2007 could save you thousands of tax dollars. Bonus: Even more for residents of high-tax states.

Without the tax law change, an estimated 25 million taxpayers would have paid an average of $2,000 more in tax.

How it works in a nutshell: The AMT is a parallel tax system with five basic steps:

1. Figure out your regular taxable income.

2. Add designated “tax preference items” to this figure and make the other technical adjustments, such as add-backs for state and local income taxes.

3. Subtract a special exemption amount based on your filing status. For 2007 returns, the exemption amounts are $66,250 for joint filers (up from $62,550 for 2006); $44,350 for unmarried filers (up from $42,500 for 2006).

Tip: The exemption amounts phase out for high-income taxpayers. The reduction is 25 cents of each dollar of AMT income above $150,000 for joint filers; $112,500 for unmarried filers. Congress has not adjusted these phase-out thresholds for inflation. Once AMT income exceeds $415,000 on a joint return, or $289,900 for unmarried filers, you can’t claim any exemption amount.

4. Apply the AMT rate to the net amount. The AMT rate is 26% for the first $175,000 of AMT income; 28% for AMT income above $175,000.

5. Compare the AMT result to your regular income tax owed, and pay the higher of the two.

Calculate the AMT on Form 6251, Alternative Minimum Tax—Individuals. The new law affects 11 other forms. (IRS News Release IR-2007-208)

Tip: The IRS is scrambling to reprogram its computer systems and forms for 2007. Visit www.irs.gov for the latest info

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