One of the most confusing aspects of our tax code is the alternative minimum tax, or AMT. The AMT is actually a tax system that runs parallel to the current code. The point of the AMT is to make sure that certain taxpayers actually pay a minimum amount of tax. (Although, like the “regular” tax code, there are ways to avoid even paying the AMT.)
Calculating the AMT
In order to determine whether or not you owe the AMT, you actually have to engage in two different sets of calculations. You have to use the “regular” method to figure out how much you owe in taxes first. Then, you use IRS Form 6251 to figure your taxes again using the AMT method.
If your AMT calculation comes out lower than your regular tax calculation, you don’t have to do anything. You pay the higher tax amount. However, if your AMT comes out higher than your regular tax calculation, you have to add the difference to your total. You are supposed to pay a higher amount in taxes.
Calculating the AMT involves making adjustments, usually to your deductions. There are a number of itemized deductions that are not allowed with the AMT, and the standard deduction isn’t allowed, either. Additionally, exercising incentive stock options, claiming foreign tax credits, and the income from tax-exempt private activity bonds, can all trigger your AMT liability.
There are a number of other adjustments that can change the way your tax situation is handled. Because certain deductions aren’t allowed, you suddenly have a higher income than expected, since you aren’t taking the deductions that normally serve to lower your taxable income (and what you owe). The items listed above are only a few of the items. You can talk to a tax professional for more information about the adjustments, and how they can change what you owe in taxes.
What are Some Deductions the Alternative Minimum Tax Allows?
- Charitable Contribution Deduction – Deductions for donations to qualified charities is honored under the AMT
- Mortgage Interest Deduction – Only allowed if the loan was used to buy, build, or improve a home
- Medical and Dental Expenses In Excess of 10%. What this means is that you can only deduct the amount in medical or dental expenses that exceed 10% of your adjustred gross income.
- Casualty and Theft Losses – These qualify to be tax-deductible under the AMT
- Taxes Paid on a Schedule C, E or F are Deductible – Taxes on a Schedule C (business), E (rental), or F (farm) are deductible in certain cases.
The AMT Patch
Because some of the itemized deductions are disallowed under AMT calculations, many middle-class households found they were being hit by the AMT – even though it was originally instituted with high-income taxpayers in mind. The AMT trigger was causing problems for many middle-class taxpayers that unexpectedly found themselves owing more than they could afford.
In order to help overcome that issue, Congress regularly passes a “patch” on the AMT. The “patch” is designed to help middle-class households avoid the unpleasant surprise associated with owing more under AMT rules. However, the patch isn’t permanent, and Congress has to regularly vote to reinstate it.
If you are concerned about whether you owe the AMT, you can do the calculation yourself. It takes a little extra time, since you basically have to figure your taxes twice, but it can provide you with peace of mind. If you have someone else prepare your taxes, consider having him or her perform the AMT calculation for you as well. Most reputable tax preparers will be able to do this for you, and might even do it without prompting.
The AMT is a very real possibility for many taxpayers, and you want to make sure that you aren’t running afoul of this quirk of our tax code.