The Alternative Minimum Tax (AMT) is a calculation of federal income tax that is separate from ordinary income tax, and must be paid in place of the ordinary income tax for any taxpayer who meets certain requirements. It is always a higher tax to pay than the ordinary income tax, but you do not have to pay both in the same year. You will always be required to pay one or the other.
Under the AMT, fewer deductions and exemptions are available and tax rates are higher. There is one comprehensive AMT exemption of $66,250 for Married Filing Jointly, and $44,350 for all other taxpayers, which phases out as income increases.
While this exemption looks favorable to ordinary exemptions and standard deduction, a careful review of the exemptions and deductions you have lost under the AMT demonstrates that this exemption really isn't so favorable after all. Who would think you would have to pay the alternative minimum tax if your family's entire income is less than $70,000?
The effective tax rates for AMT are 32.5-35% of AMT income, 25% higher than the common tax brackets filers would pay under the ordinary income tax.
The alternative minimum tax is triggered by the amount of certain tax preference items, i.e. a significant level of itemized deductions, tax exempt interest, gains on the sale of a small business, incentive stock options, depreciation on rental properties and partnerships or S corporations, self-employed health insurance deductions, IRA distributions, and other less common preference items, all may trigger AMT.
Form 6251 is used to compute the potential tax that could be due, known as the Tentative Minimum Tax (TMT). The TMT is compared to your ordinary income tax calculation from Form 1040, and the tax that is greater is the one that must be paid. If TMT is greater it then becomes AMT, the alternative minimum tax you are subject to for the tax year.
Unfortunately, it has become more and more difficult to avoid AMT as time has gone by. AMT was established in 1969 because many high income taxpayers were able to use the extraordinary number of deductions and loopholes that were available at that time in order to pay little or sometimes, no income tax at all.
But as this tax has never been indexed for inflation, unlike the standard tax rates and exemptions, as the income of the average taxpayer keeps increasing, more and more ordinary citizens are subject to its higher rates.
You can monitor the potential for falling under the AMT by closely reviewing Form 6251 each year, and monitoring the activities that affect the line items on this form throughout the year. If necessary, you may want to time income and deductions associated with AMT in order to avoid or minimize this tax.
Products like TurboTax Online can handle most tax returns with ease (and allow you to file your taxes electronically for a faster refund).
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