Updated

This week, Gail dispels some illusions about the Alternative Minimum Tax and has more to say about 529 college savings plans.

Gail —

You have described a lot of the wonderful things that are happening to the tax code thanks to the new Tax Act. However, one thing you did not mention is a little provision called the Alternative Minimum Tax. Has the "trigger" level for this tax been adjusted since it was written into the code? I don't even recall when this provision was enacted but I would like to know what the current level is, adjusting for inflation.

Thanks,

Vic

Dear Vic

You are a true romantic! How sweet of you to imagine that there has been any inflation adjustment with regard to the Alternative Minimum Tax (AMT). The realists out there could have predicted that is definitely not the case. That's why I consider the AMT one of the nasty "hidden" taxes that conveniently gobble up more income every year without politicians having to go on record to vote for a tax increase.

The AMT has been around for decades. The original objective back in the days when tax shelters (think "oil leases" and "cattle ranching," dahling) were thriving was to prevent "the rich" from taking so many deductions that they ended up not paying any income tax at all. The AMT requires folks to calculate their taxes TWICE: the regular way and again under the AMT method, which makes you add back in many of the deductions you were allowed under the regular system.

Our beloved politicans in Washington know full well that contrary to its original intent, the AMT sucks in more and more "middle class" taxpayers each year, but for some reason they can't bring themselves to do anything even remotely resembling an inflation adjustment. As part of the 2001 Tax Act the best they could do was increase ever-so-slightly the amount of AMT Income that is exempt from tax   but only for 2001 through 2004.

In addition, instead of multiple tax rates, there are only two AMT rates, the lowest being 26% not 10% or 15%.

To calculate your Alternative Minimum Tax Income, you start with your Adjusted Gross Income and add back many of the deductions you took. For instance, while you can normally deduct medical expenses that exceed 7.5% of your income, under AMT rules, medical expenses are not deductible until they exceed 10% of your income. There is also no "Standard Deduction" and no deduction for personal exemptions. (Please note: I strongly advise you get professional tax help with this!)

Once you calculate your AMT Income, you subtract $49,000 (up from $45,000- big deal) if you're married filing jointly or $35,750 (up from $33,750) if you're single. Then you apply the two-tiered tax schedule to the amount that remains.

According to the folks at National Underwriter, here's how your tax bill is figured:

AMT income that exceeds these amounts gets taxed at a rate of 28%, period.

In case I haven't been clear about this, this kind of stealth tax makes me very angry. I urge you to contact your representatives in Washington if you feel likewise.

Gail

P.S. Don't forget that the $4,000 and $2,000 increases to the exemption amounts apply to THIS YEAR'S income, but expire after 2004.

Attention Parents & Grandparents —  529 Alert!

Dear Readers,

As many of you know, I've written extensively about the tremendous advantages 529 college savings plans. (Click on the Money Matters Archive logo on the upper right-hand corner of this page if you want to re-read the Nov. 16 article on 529 plans) This is one thing the politicians have gotten right, so let's give them their due.

Among other benefits, whoever owns the account (mom, dad, grandma, Auntie Mae, etc.) retains complete control over the money; only the account owner can authorize withdrawals and he/she can change the beneficiary to another family member if desired. In addition, starting next year, qualified withdrawals from these plans are federally tax-free. (Depending on the plan you choose and state you live in, state taxes may still apply.)

There are also significant estate planning benefits. Thanks to a special provision of the tax code, you can contribute five years' worth of annual gifts to a 529 plan in a single year without owing any gift tax, provided you don't give the beneficiary any more gifts for 5 years. In other words, this year you can contribute $50,000 per beneficiary (5 x $10,000).

Starting with the year of your contribution, you simply assign $10,000 to your annual gift for that year. By the fifth year, your taxable estate is reduced by $50,000 even though you still retain control over the money. (Are you listening, grandpa?) There is no other account like this in America!

Even better, a couple can make double the contribution of a single person, meaning grandpa and grandma together could make a $100,000 contribution to a 529 account for the same child!

As I mentioned in a previous column, next year the amount you can give someone gift tax-free increases to $11,000. So if you wanted to take full advantage of the special gifting priviledges, you could contribute $55,000. But what if you stepped up to the plate this year and had already contributed $50,000? Under the higher limits you could add more next year, but how much?

According to an IRS spokesperson, since 529 gifts are "spread ratably" over 5 years, a donor could contribute an additional $5,000 to the account in 2002 and not be subject to gift tax. That's because each year, $1,000 of this would be added to the amount you had previously spread over 5 years, making your annual gift $11,000 in 2002-2005, with the extra $1,000 applied to 2006.

In the case of grandpa and grandma in the example above, they could each contribute an additional $5,000, for a total of an additional $10,000 next year. Who knows? Christmas could come in January for some lucky, aspiring students!

Hope this helps you with your shopping list,

Gail

If you have a question for Gail Buckner and the Your $ Matters column, send them to moneymatters@foxnews.com along with your name and phone number.

The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.