The major purpose behind the alternative minimum tax was to make sure that the people with ridiculously large amount of wealth are not able to shelter all their income, by way of deductions. Now, over a period of time, who should e considered as wealthy, is actually a matter of great contention.
Now, instead of opting for a tax net covering the wealthy, the Alternative Minimum Tax has become a stealth tax, which adversely affects the upper middle class taxpayers. As it is, these taxpayers are usually not able to see it coming until it hits the roof. According to the archives, around twenty thousand taxpayers came under the Alternative Minimum Tax category in the year 1970. By the next thirty six years, the number has grown up to around four million. Not just that, according to the Internal Revenue services, this number would further go up and may touch a level of more than thirty five million by the year 2010.
Now, the major issue in terms of the Alternative Minimum Tax, is not in regard to the tax bracket, which is actually lesser than the regular tax system. The main problem is in regard to the deductions, which it does not allow. So, while you may still consider mortgage interest, as well as charitable donations, the Alternative Minimum Tax, would however, exclude the state, as well as the local income taxes, as well as property taxes, child tax credits, home-equity loan interest, unreimbursed business expenses, tax preparation fees and legal fees.
As it is, lack of these exemptions, make you end up with a higher taxable income. By way of simply living in a place with higher property tax or having a big family might trigger the alternative minimum tax, as would a mortgage deduction. By way of exercising the incentive stock options might be the biggest and the most unexpected blow. Under the alternative minimum tax, the difference in between the exercise price, as well as the market price should count as income. Now, before you opt for an incentive stock option, you should always consult a financial professional. This is because, the number of options, which you exercise, as well as the timing may substantially affect the amount of taxes, which you would owe on this gain.
In fact, the private activity bond, or the municipal bonds for various public projects like the airports, as well as stadiums, tends to lose the tax-free status in alternative minimum tax. As it is, you should consult your financial professional while investing in private activity bonds.
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