Alternative Minimum Tax (AMT)

• 12 April 2017 | 1087 Views | By Mint2Save

An alternative minimum tax (AMT) is a parallel tax system that operates along with the regular income tax by adding certain items that are tax-free back into adjusted gross income and disallowing many deductions under the regular tax system. It provides an alternative set of rules that is used to calculate your taxable income after allowed deductions.

AMT is compulsory at a nearly flat rate on an adjusted amount of taxable income higher than a certain threshold also known as exemption and this exemption is considerably higher than the exemption from the regular income tax.

The alternative minimum tax came half a century ago as lawmaker seeks to prevent the rich from escaping their fair share of federal income taxes. It wants high income earners to run the numbers twice under the regular tax rules and under the strict AMT rules and pay the higher outstanding amount. Distinct from the regular income tax, the AMT was not close to inflation, thus this tax is affecting a rising number of middle class now.

Alternative Minimum Tax (AMT) Exemption Amounts

How Is the AMT Calculated?

1. In computing taxable income, eliminating or reducing certain deductions and taking into consideration the differences with respect to when certain items are taken into account in computing regular taxable income and alternative minimum taxable income.
2. After that subtracting the Alternative minimum tax exemption amount,
3. Then multiplying the amount computed in 2 by the suitable AMT tax rates. The AMT has two tax rates 26% and 28%.
4. After that subtracting the AMT foreign tax credit.

Will the AMT affect you?

Yes, it is much possible to affect you if:

• You are married
• You have a large family
• You have high medical expenses
• You are living in a state of high income tax.

Aim of AMT:

AMT is planned to stop taxpayers from escaping their fair share of tax liability so that they can save through tax breaks. Though, the formation was not indexed to inflation or tax cut. Because of such a situation upper middle income taxpayers are liable to this tax rather than the rich taxpayers for which AMT was formed. The purpose of AMT is to limit taxpayers from collecting too much benefit under the regular income tax law. The conception of an alternative minimum tax did not continually exist. It was created in 1969 with a purpose that the rich taxpayers and corporations from using excuse or big deductions to stay away from paying a minimum amount of taxes.

What tax deduction do you mislay under the AMT?

Typically, all taxpayers look for deductions such as credits and other ways to lessen their taxable income. But unfortunately, under the AMT, you cannot take these tax breaks. But you still can deduct charitable contributions and mortgage interest, although home-equity loan interest faces stricter scrutiny.

Still, you cannot deduct local and state taxes and various other items such as unreimbursed travel expenses and investment fees and interest and also the Personal exemptions like of dependents and the standard deductions. Investors could also face AMT and the long-term capital gains and definite dividends could push your income into the AMT.

There is nothing you can do to avoid paying the AMT but you may plan further for next year by following strategies:

1. Lessen your list of deductions.
2. Lower your adjusted gross income by making out contributions to an IRA or health savings account.
3.  Try to increase your charitable contributions.
4. Concentrate to long term capital gains that are included in AMT income.
5. You can even opt for pre tax medical deduction plan as you can decrease your salary to pay your medical expenses on a pre tax basis and that ultimately helps you to reduce both the AMT and your regular tax.
6. If a state tax refund is included in your regular income tax return, then you need to eliminate it from your income for AMT purpose because you do not receive an equivalent deduction for state taxes.
7. Make use of tax planning software such as TurboTax during the year to minimize your tax liability.
8. Study the Form no. 6251 every time when you get ready to prepare your tax return to see how close you are to paying the AMT. Estimate how close your Tentative Minimum Tax was to your regular tax.
9. If you use stock options during the year must see Incentive Stock Options (ISO) for guidance on how the timing of the consequent sale of stock can affect your AMT.