There is a ticking tax bomb that will hit 16 million Americans this year. The problem with this tax is that typical tax planning doesn't work. It has its own rules.

This sneaky tax is called Alternative Minimum Tax (AMT). The problem is that it's a complicated tax to calculate and even harder to try to explain, so most tax advisors aren't talking about it. But, here's a statistic that everyone should be talking about: This year over 16 million taxpayers will be subject to it. And, in just a few more years, 30 million taxpayers will be, unless Congress does something to combat it.

The tax is calculated based on an "alternative" calculation of your income. A lot of the deductions that you're used to taking on your tax return, aren't allowed when you're subject to AMT.

You might be subject to AMT if:

• You have income over $50,000 per year.

• You have a lot of depreciation deduction on your return.

• You have a lot of capital gains in relationship to regular income.

• You are a real estate professional.

What exactly is AMT? There are two main differences between regular income tax and AMT.

First, the way the income is calculated is different. Deductions that are allowed against regular income might not be allowed against income when AMT is used. Some examples of the disallowed deductions are:

• Accelerated depreciation

• Home equity interest

• Medical expenses

• Property tax

• State income tax

Secondly, there is a flat rate of 26 percent or 28 percent applied to the AMT calculated income. Forget the special benefits of long-term capital gains (which is generally taxed at a maximum of 15 percent instead of the 35 percent highest rate) that come under regular income tax. You lose the special rate for long-term capital gains.

There is one more issue that is especially applicable to real estate agents. As a full-time real estate professional, you get special privileges when it comes to paper losses that you're able to generate from your real estate. Normally, you are limited to $25,000 of those losses against your income if you make less than $100,000. And, if you make over $150,000 per year, you can't take any of those losses.

One of the huge benefits of owning real estate investment property is the paper loss you can legitimately generate as you can continue to put money in your pocket from the investments. In other words, you've got cash flow and yet still have a legal tax loss. Stay tuned to this column for more information on how that is possible or visit my website at taxloopholes.com for free tax strategies you can use right now.

The tax breaks are there for real estate investors, but are limited as your income goes higher. But, that's where being a real estate professional comes into play. As a real estate agent, you qualify as a real estate professional in the IRS's eyes and that means you can take an unlimited amount of loss against your income, no matter how much the income is.

It's a great loophole. But, it doesn't work for alternative minimum tax. In other words, if you're counting on real estate losses to offset your real estate commissions when it comes to tax time, you might just be out of luck if you're subject to AMT.

Here are three things that you should do if you're concerned about AMT. (And, in my opinion, everyone should be concerned about AMT. It won't be long before most taxpayers will be having a real issue with it -- if not this year, soon, the ticking tax bomb is going to explode.)

• First, determine if you're going to be subject to AMT this year. Contact your tax professional and ask them to prepare an AMT worksheet to look at whether AMT is likely to be an issue for you this year.

• Second, every single time someone explains a tax strategy or tells you can get a tax deduction for an expense, ask, "How does this affect AMT?" That may be the single most important question you ask in 2006.

• Third, plan your income, deductions and capital gains if AMT is an issue this year. Keep up to date on AMT tax planning techniques and make sure your advisor is doing the same.

We all hope that Congress addresses the mounting problem of AMT, but until they do, it's up to us to proactive plan against this sneaky little tax.

Published: May 25, 2012

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