Alternative Minimum Tax Means Maximum Effort to File!
The Alternative Minimum Tax (or AMT) was created by Congress as a way to make sure that high-earning Americans cannot sidestep their income tax liabilities altogether by taking advantage of the many tax breaks that exist for the super-rich. Under current AMT and tax law standards, though, upper-middle-class individuals are also getting hit by the AMT.
The AMT should be viewed as if it were a completely different tax system compared to the regular federal income tax rules that apply to the majority of Americans. For example, some types of income considered to be tax-free by normal tax standards are actually taxable under the AMT. Also, the AMT does not allow certain types of tax deductions, which are permitted under normal tax standards. Another difference is the maximum AMT tax rate, which is 28 percent, versus the regular maximum tax rate of 39.6 percent. The AMT provides for high exemptions, too — $80,800 for couples who file jointly and $51,900 for individual filers. Nevertheless, these exemptions disappear if your AMT income gets beyond a certain level and the lower tax maximum of 28 percent may not seem very forgiving when big numbers are involved.
Because of the way the Alternative Minimum Tax is calculated, it will not apply to most individuals. However, if your Alternative Minimum tax liability is higher than your regular tax liability, you will have to pay the higher amount.
Until a tax accountant or tax attorney has thoroughly reviewed your financial situation, it can be difficult to know for sure if you will be liable to pay the Alternative Minimum Tax. However, there are a variety of financial activities that could be a sign you could be vulnerable to the AMT.
- High income: If your income is particularly high (over $250,000) it is highly likely that your AMT tax exemptions will have canceled out and you will be required to pay the AMT.
- High deductions for state and local income and property taxes: If your deductions for these kinds of taxes exceed $20,000, you could be vulnerable to the AMT because these types of deductions are not allowed under AMT tax standards.
- You’re married with multiple children: Under normal tax guidelines, you are afforded various tax deductions if you are married, and even more deductions if you have children. However, these deductions are not allowed under the AMT tax rules.
- You exercised incentive stock options that were “in-the-money”: Under regular tax codes, the income generated from exercised incentive stock options is tax exempt. However, this will be considered income by AMT standards.
- You have a lot of tax write-offs: Unfortunately, if you have a lot of itemized tax deductions (like deductions relating to investment expenses, tax advice and tax preparation fees, and business expenses for example) these will not be deductible by AMT standards and will serve to increase your AMT liability.
- You have a lot of business depreciation write-offs: Write-offs for the depreciating value of computers, furniture, equipment and other items used in your sole proprietor business, limited liability partnership, partnership or S corporation are not always allowed under AMT tax codes. The assets must have depreciated for a longer period of time under AMT tax codes, if you wish to include those deductions.
- Private activity bond interest: This type of bond interest is not taxable under normal tax codes, but is under the AMT.
If any of the above situations are true for you, then it would be wise to calculate your AMT liability after calculating your normal federal tax liability. The IRS provides Form 6251 (Alternative Minimum Tax-Individuals) for the purpose of calculating your AMT liability. If the AMT is higher than your regular tax liability, then you will have to pay the AMT.
The AMT does not only apply the super-rich. Upper-middle-income individuals are often surprised to find the AMT also applies to them. Even if just one of the above-listed risk factors applies to you, then you may wish to discuss your tax situation with an attorney familiar with AMT tax standards. AMT tax codes are complex and difficult to navigate — especially for an individual who has never been vulnerable or had to deal with the Alternative Minimum Tax before. Being sure about your taxes is well worth the alternative of being subjected to back taxes, interest adjustments and fines down the road.
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