Academic journal article Journal of Accountancy

Middle-Class Family Falls Victim to AMT

Academic journal article Journal of Accountancy

Middle-Class Family Falls Victim to AMT

Article excerpt

The alternative minimum tax (AMT) is a parallel tax system (calculated separately from regular taxes) designed to ensure that wealthy taxpayers with substantial tax preference items are subject to some income tax liability. A recent Tax Court case, however, indicates that the AMT can be applied even in the absence of the tax loopholes.

In Klaassen v. Commissioner, TC Memo 1998-241, the court decided that the AMT could be applied to large families of modest income with no real tax preference items except personal exemptions. This case shows that, because the AMT is not indexed for inflation, unwary middle-class taxpayers, whom Congress never intended to be subject to this tax, are now getting caught in its web.

The Klaassens were members of the Reformed Presbyterian Church of North America. They believed that a large family was a blessing and they opposed birth control and abortion measures. On their joint 1994 itemized return, the Klaassens reported adjusted gross income of $83,056; claimed 12 personal and dependency (10 children) exemptions; and deducted $4,767 in medical and dental expenses and $3,264 in state and local taxes.

Upon audit, the IRS determined that the Klaassens were subject to the AMT, despite the fact that they had no tax preference items for regular income tax purposes.

Following the letter of the law as outlined in form 6251, the IRS adjusted the Klaassens' personal exemptions downward, disallowed their deduction for state and local taxes and limited their medical deductions to 10% of adjusted gross income instead of the 7.5% allowed for regular tax purposes. It then calculated their AMT taxable income at $68,832, substantially higher than the $34,092 of regular taxable income the Klaassens had reported on the form 1040. …

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