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As we close in on April 15, the two hottest tax topics seem to be the Alternative Minimum Tax (AMT) and the new sales tax deduction. While the sales tax deduction is new for 2004, the AMT has been around for over 30 years and has recently begun impacting a rapidly increasing number of taxpayers.

The Alternative Minimum Tax

The AMT is essentially a separate tax that parallels the regular federal income tax. It was designed in 1969 to keep the richest taxpayers from getting away without paying taxes after taking advantage of deductions. The catch is that the AMT is not indexed for inflation. As incomes rise due to inflation, middle class incomes have begun to meet the AMT's minimum thresholds. The recent tax cuts actually make matters worse by reducing tax liability, which increases your likelihood of being subject to the AMT.

Exactly who is in danger of being subject to the AMT? A recent Brookings Institute study reports that about one-third of all tax returns will fall under the AMT by 2010. Here's who the report projects will pay the higher tax in five years:

• 93 percent of households with incomes of $100,000 - $500,000.
• 85 percent of all married couples with two or more kids - this is because the AMT prohibits deductions for dependents
• 97 percent of married couples with two or more kids and a household income of $75,000 - $100,000
• 37 percent of tax filers with incomes of $50,000 - $70,000 (the Congressional Office of Management and Budget predicts an even higher percentage for this group - 66 percent).

If you make more than $100,000, you should take steps to find out if you are liable for the AMT. If your gross income is over $75,000 and you deduct for personal exemptions, real estate taxes, sales taxes and interest on a home equity loan, you should find out if you are subject to the AMT. Other factors that make you vulnerable include exercising stock options during the year, owning a business or rental property, partnership interest or S corporation stock.

How much is the AMT for each taxpayer? Just as with your regular federal taxes, your total each year is based on a variety of factors. Suffice it to say it is higher than your federal income tax would be. Once you have computed your taxable income using the AMT rules and taken the AMT exemption, your tax rate will be 26 percent on part of your income and 28 percent on the remainder. After determining your tax liability under the regular federal tax filing and under the AMT rules, you pay the higher tax amount.

By the way, if you get audited and it turns out you should have paid the AMT but didn't, you will owe the back taxes plus any interest or penalty that the IRS assesses you.

Click here for more on the AMT

Sales Tax Deduction

If you are not subject to the AMT (the AMT does not allow sales tax deductions), new legislation allows you to deduct state and local sales taxes in 2004 and 2005 in lieu of state and local income taxes starting with the 2004 tax year. You must itemize deductions in order to get this tax break. Nonetheless, figuring this deduction could be worth your while.

Given that most people do not save all their receipts to calculate actual sales tax expenses, the IRS has established standard deductions based on income, number of dependents and state of residence. The tables indicate the total you can deduct from your federal tax burden. Many accounting professionals believe the tables do not allow a large enough deduction, so you may want to save your 2005 receipts. Click here to see the tables www.irs.gov/pub/irspdf/p600.pdf

In addition to the deduction amount from the table, you can deduct sales taxes paid on:

• motor vehicles (up to the amount of tax paid at the general sales tax rate)
• aircraft, boat, home or home building materials (if the tax rate is the same as the general sales tax rate)

For more on the new sales tax deduction, visit www.irs.gov/newsroom/article/0,,id=134768,00.html

Questions on this or other tax topics? Contact Steve Dolan at steve.dolan@pnfp.com or at (690-4077).

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