C O A L I T I O N Corner Coalition Corner: Business training tools for HR staff, real estate licensees and other service professionals in the relocation and real estate industries Alternative Minimum Tax Requires Gross-up Decisions By Peter K. Scott, Coalition Tax Counsel © 2006, Employee Relocation Council/Worldwide ERC ® Coalition

C O A L I T I O N Corner Program objectives This program supplements an editorial feature in Worldwide ERC ® ’s Mobility magazine This segment will: –Define the Alternative Minimum Tax (AMT) system –Examine how the application of the AMT may increase costs for companies that tax protect relocating employees by grossing up –Provide examples and suggest resources for more information

C O A L I T I O N Corner AMT: What is it?  The Alternative Minimum Tax is a tax system parallel to and separate from the regular tax system  It operates by denying the benefits of certain items allowable in the regular tax system, and calculating tax on a different base

C O A L I T I O N Corner Some Basic Facts: AMT is computed on Form 6251 for individuals, and Form 4626 for corporations Generally, Alternative Minimum Taxable Income (AMTI) is considerably higher than regular taxable income Allows specified exemption amounts—currently $58,000 for married couples filing jointly, $40,250 for individuals and $40,000 for corporations Exemptions phase out at certain levels: –For married couples, the exemption begins to be eliminated once AMTI exceeds $150,000, and is completely eliminated at AMTI of $382,000 –For singles, the exemption begins to phase out at AMTI of $112,500, and is eliminated at AMTI of $273,500 –The phase-out is 25 cents for each $1 of AMTI over the threshold AMT: Some Basic Facts

C O A L I T I O N Corner Some Basic Facts (continued): The AMT tax rate is applied to remaining AMTI after the exemption The rate of tax is 26% on the first $175,000 of AMTI, and 28% on amounts in excess of that The core of the AMT is its denial of certain items allowable under the regular tax system, such as (for individuals): personal exemptions the standard deduction and itemized deductions for state and local taxes and miscellaneous expenses (such as employee business expenses) AMT: Some Basic Facts

C O A L I T I O N Corner  First, regular tax liability is computed  Then a separate calculation is conducted to determine the tentative minimum tax  The tentative minimum tax is compared to the regular tax, and if higher, the taxpayer must pay both the regular tax and the excess of tentative minimum tax over regular tax  This excess is the AMT AMT: How is it calculated?

C O A L I T I O N Corner Suppose a married couple has a regular taxable income of $100,000 for 2004, and tax preference and adjustment items of $40,000 that are disallowed in computing Alternative Minimum Taxable Income The regular tax on $100,000 is $18,620. The couple’s AMTI (regular taxable income plus tax preferences and adjustments) is $140,000 The applicable exemption amount of $58,000 is subtracted, leaving $82,000 The tentative minimum tax is $21,320 ($82,000 times 26%) The AMT liability is $2,700 ($21,320 minus $18,620) The couple’s tax liability would be $21,320, consisting of regular tax of $18,620 and AMT of $2,700 AMT: An example

C O A L I T I O N Corner AMT and Individuals What can push ordinary taxpayers into the AMT? –Primarily non-allowable items, combined with inadequate exemption amounts The denial of miscellaneous itemized deduction is viewed as particularly unfair by employees with unreimbursed business expenses, because: –Such employees are already treated less favorably than businesses, as they are limited to deductions that exceed 2% of adjusted gross income and –The disparity is even more pronounced when computing AMT, as sole proprietors (or any other types of businesses) get a full deduction for business expenses while employees receive no deductions

C O A L I T I O N Corner AMT and Corporations For companies that gross up for additional federal income tax caused by relocation, increased applicability of the AMT poses a problem At current exemption amounts, a fairly small number of employees will encounter the AMT, but, if the exemption returns to a previous level of $33,750, then it could impact an increasing number of employees and significantly increase their taxes As companies are increasingly faced with these challenges, they are encouraged to consider a variety of approaches and develop policies to handle AMT scenarios Companies must consider whether the increased taxes that will be encountered by transferees should be grossed up, and be aware of how to do the necessary calculations

C O A L I T I O N Corner For more information… The Worldwide ERC ® Coalition continues to monitor any Congressional action that may impact the AMT and will report changes as and when they develop A more detailed analysis of the current AMT is also available to subscribers to the Coalition’s Tax and Legal MasterSource at tax.shtml (see for information on subscribing)