01:00 AM EDT on Tuesday, July 25, 2006

Because of a new Rhode Island law, you can calculate your Rhode Island income tax two ways -- under the regular system or the new flat-tax system -- and use whichever benefits you most.

But where does the dreaded alternative minimum tax fit in? That's what a man from Warwick asked MoneyLine:

Q: I've been reading your MoneyLine and I was wondering how the flat tax [is] going to work in with the AMT. Now I think that's a pretty good question to bring up at this time. . . .

-- E.M., Warwick

A: It sure is. Although tax-filing season is months away, many taxpayers must calculate their Rhode Island tax now, especially those who must make a quarterly estimated payment in September. So here's the deal:

If you've never had to pay the alternative minimum tax (AMT), odds are you don't want to even think about it, especially in summertime.

But if you've had to pay the tax, or you may have to pay it, it's a big deal.

Why? In 1969, Congress approved a minimum income tax in response to reports that showed a few hundred wealthy Americans weren't paying any income taxes.

That was the predecessor of the current AMT. In general, it's intended to ensure that everybody pays at least some income tax.

How does it work? You figure your income tax under the usual rules. When you're finished, you're supposed to go back and figure it under the AMT rules.

The problem is that the AMT rules generally don't allow you to claim all of the exemptions, deductions and other breaks that are allowed under the regular rules. The AMT also has higher, punishing tax rates.

The federal government has an AMT system. Rhode Island has its own AMT. But here's a tantalizing tidbit:

The AMT can attack you only if you use Rhode Island's regular income-tax system. If you use the new flat-tax system, you needn't worry about the AMT -- it doesn't come into play, said Patricia A. Thompson, former president of the Rhode Island Society of Certified Public Accountants.

This makes sense when you think about it, said Mary F. Bernard, president-elect of the CPA society.

After all, in general, the AMT is often triggered by people who claim a lot of exemptions and deductions. Rhode Island's regular income-tax system lets you claim exemptions and deductions. So Rhode Island's AMT could enter the picture only if you calculate your Rhode Island income tax using the regular Rhode Island tax system, said Bernard, a principal with Kahn Litwin Renza & Co. Ltd, a CPA firm in Providence.

Rhode Island's new flat-tax system doesn't let you claim exemptions and deductions. Instead, it uses a flat rate (8 percent for this year, lower in future years). In general, the flat rate is applied to your adjusted gross income, which isn't reduced by exemptions and deductions.

Thus, if you choose the new flat-tax system, you won't have to worry about the AMT, said Thompson, tax partner at Piccerelli Gilstein & Co. LLP, a CPA firm in Providence.

So if you calculate your Rhode Island income tax under the regular system, and it looks like you're going to be triggering Rhode Island's alternative minimum tax, consider using the flat-tax system instead, Thompson said.

That won't guarantee you a lower tax, however.

One reason involves the tax treatment of investment income, such as capital gains. (In general, "capital gain" means your profit on the sale of stock or other assets you hold for investment. The tax on that profit -- on that "gain" -- is called a capital-gains tax.)

For example, the regular Rhode Island system taxes capital gains at a maximum rate of 5 percent for this year (the rate will be lower in future years).

The flat-tax system treats investment income the same as wages and other ordinary income, taxing it all at a flat rate of 8 percent for this year (the rate will be lower in future years).

"If you have large capital gains, going with the old system may be better -- even with the AMT," because of its more favorable tax treatment of capital gains, Thompson said.

Yes, it's complicated. So here's the answer in a nutshell:

There are two ways to calculate your Rhode Island income tax: under the regular system (which may trigger AMT), or under the flat-tax system (which won't trigger AMT).

You've really got to figure your tax under both sets of rules to figure out which will result in a lower tax for you.

It's also one more reason to use a computer program, or a professional who uses a computer program, to figure your tax. That's because the Rhode Island tax system has grown too complex to rely solely on pencil and paper (unless your tax situation is fairly straightforward).

And remember: Even though tax-filing season is about six months away, lots of people need to know now how much Rhode Island income tax they must pay.

That includes many self-employed people, who have a quarterly estimated tax payment due in September.

TODAY'S TIP: In time for its 30th anniversary, the Pension Rights Center has launched a newly designed Web site:

www.pensionrights.org

The new site features expanded information on pension issues, with some user-friendly elements.

For example, it includes an easy way to obtain online versions of the center's helpful publications. It also includes detailed explanations of pension legislation and regulations, written in plain language.

(This is good to know, because a congressional conference committee has been working recently on what could turn out to be a massive rewriting of the laws involving pensions and retirement-savings plans.)

The Pension Rights Center is a nonprofit group based in Washington that works to protect and promote the retirement security of workers, retirees and their families.

Neil Downing is a Journal staff writer and author of The New IRAs and How to Make Them Work for You. Questions about your money matters? Call us at 1-401-277-7484 and leave a message, or e-mail:

moneyline@projo.com

Sorry, no personal replies; as many questions and issues as possible will appear here.