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Correction to This Article
A March 7 Business article gave incorrect figures for the income ceilings for claiming the Hope and Lifetime Learning tax credits for college costs. The credit starts being reduced when a single taxpayer's income reaches $41,000 and becomes unavailable at $51,000. The phaseout range is $83,000 to $103,000 for a married couple filing jointly.
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Changes Guarantee April 15 Surprises

Taketh: The AMT, as the name suggests, is an alternative way of calculating taxes. You get a big standard deduction but have to put back many of your personal exemptions and many itemized deductions, including state and local taxes; mortgage interest on debt not used to buy, build or improve a home; and interest on certain kinds of tax-exempt bonds. The AMT has two brackets, 26 percent on the first $175,000 and 28 percent on the rest, if any. You compare your tax under the AMT with what you'd pay the regular way and pay whichever is higher. As regular rates come down, the greater the chance that the AMT will be higher, reducing or wiping out the benefit of the tax cuts.

Particularly painful for many taxpayers will be the provision that interest on money taken out in a home refinancing, unless the cash was sunk into the house for improvements, is not deductible for the AMT. Such interest is deductible, at least on debt up to $100,000, for the regular tax calculation.

David Brooks looks through stacks of tax forms at a New York public library. Some tax credits require special forms. (Daniel Acker -- Bloomberg News)

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The AMT even has an impact on the special low dividend and capital gains rates. Because of interactions too complicated to explain in a family newspaper, the AMT will ensure that many taxpayers who have dividend or capital gain income will not see the full benefit of the low rates.

Giveth: When tax rates were lowered last year, the Treasury Department did not adjust withholding tables used by employers until July 1, and then it changed them only enough to bring withholding into line with the new rates for the second half of the year. The result: Many people were over-withheld for 2003 and should get an unusually large refund.

Taketh: The AMT and a variety of other considerations, such as possibly lower incomes, seem to be clawing back the extra benefit. Through the end of last month, the Internal Revenue Service reports, the average refund had risen only $94 to $2,230, from $2,136 last year.

Giveth: House prices have been soaring and, along with them, property taxes. These taxes are painful -- but at least you get to write in a really big number on your 1040's Schedule A, "Itemized Deductions."

Taketh: Assuming this big deduction doesn't trigger the AMT, it may be partially offset by a smaller mortgage-interest deduction. Many homeowners refinanced last year to take advantage of the historically low rates. But while it's nice to pay less interest, it does mean a smaller entry on Schedule A.

In addition, higher-income taxpayers have to face "PEP and Pease," two provisions that reduce or eliminate their personal exemptions and itemized deductions. PEP, the personal exemption phaseout, begins at an adjusted gross income of $139,500 for a single taxpayer and $209,250 for married couples. Pease, named for its congressional sponsor, the late representative Donald J. Pease (D-Ohio), causes most itemized deductions to start phasing out at $139,500 for both married and single taxpayers (a big marriage penalty for some two-income couples).

These provisions were stuck into the law in 1986 as soak-the-rich revenue-raisers. The 2001 tax cut will eliminate them in stages between 2006 and 2009, but as of now they remain fully effective. They interact with the AMT in unpredictable ways, experts say. For example, since they tend to boost the regular tax, they may spare some taxpayers from paying the AMT. In other cases, they may make it more advantageous for a taxpayer to take the standard deduction.

PEP, particularly, encourages high-income taxpayers whose children also have income -- but not so much -- to take the children off the parents' return as dependents and let them file on their own. Sometimes this strategy also allows the child to claim special tax benefits for which the parents are ineligible.

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