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Alternative Minimum Tax | Tax Planning

The purpose of the alternative minimum tax (AMT) is to help keep the wealthy from using tax loopholes in order to avoid having to pay taxes. It was designed to make the tax system fairer. Before the AMT was instituted, some high earners found a way to legally use tax deductions and other tax credits to pay no federal income taxes. Unfortunately, the tax did not adjust automatically for inflation causing more middle class taxpayers to have to pay the AMT every year in addition to tax payers with high incomes. In 2013, Congress passed a permanent patch to address this issue with the AMT.

 What Is The Alternative Minimum Tax?

 The alternative minimum tax is a tax system that operates parallel to the regular tax. It essentially expands the income amount that is taxed. It does not allow many of the deductions that are allowed in the regular tax system and it adds in many tax-free items.

 Alternative Minimum Tax Adjustments

 There are numerous adjustments made when calculating the AMT. There is some income added that is not subject to regular income tax. There are some deductions that are eliminated or adjusted down.

Items that may cause an alternative minimum tax liability include:

  •  Itemized deductions for medical expenses, miscellaneous expenses or for local and state taxes
  • Mortgage interest
  • Property tax
  • Exercising incentive stock options (not selling)
  • Accelerated depreciation
  • Losses or passive income
  • Deduction for net operating loss
  • Investment expenses
  • Foreign tax credits
  • Tax exempt interest from private activity bonds

 2014 AMT Exemption Amounts

$52,800 – Single or Head of Household

$82,100 – Married Filing Jointly, Qualifying Widower or Widow

$41,050 – Married Filing Separately

 2013 AMT Exemption Amounts

 $51,900 – Single or Head of Household

$78,750 – Married Filing Jointly, Qualifying Widower or Widow

$39,375 – Married Filing Separately

These exemption rates mean that this amount of income recalculated under AMT rules is not subject to the alternative minimum tax. Any income that is over the exemption amounts may be subject to the alternative minimum tax.

 Alternative Minimum Tax Rates

There are only two tax brackets for the AMT – 26% and 28%. The alternative minimum tax rate is only on the AMT income over the exempted amount.

2014

The 26% alternative minimum tax bracket ends, starting the 28% alternative minimum tax bracket at:

  • Married Filing Separately:      $91,250
  • All other filing statuses:          $182,500

2013

The 26% alternative minimum tax bracket ends, starting the 28% alternative minimum tax bracket at:

  • Married Filing Separately:      $89,750
  • All other filing statuses:          $179,500

Do I Have To Pay The AMT?

You can easily figure out if you have to pay the additional alternative minimum tax by filling out Form 6251. You will be required to pay the AMT if the calculated tax on Form 6251 is higher than the tax on your regular tax return. You will have to pay the difference as alternative minimum tax. You will also have to pay the amount calculated on your regular tax return.

If you have to pay the AMT, you can determine why you have to pay the additional tax by looking closely at your Form 6251. Look at your entries on lines 1 through 27. These entries adjust your taxable income for alternative minimum tax purposes.

You can also use the AMT Assistant for Individuals calculator available at www.irs.gov. Additionally, most tax software will automatically calculate the alternative minimum tax.

Alternative Minimum Tax Planning

 It can be difficult to devise a tax strategy for the AMT because it is often adjusted for many credits and deductions. Tax professionals generally recommend the following AMT planning tips.

 Get reimbursed from your employer for all business expenses. These business expenses are included in the miscellaneous itemized deductions that are added to your AMT income. When your employer pays you back for your business expenses, it is a tax free event and it prevents an increased AMT adjustment.

Make sure your state tax withholding is just enough so that you do not owe additional taxes at the end of the year but not too much causing you to overpay substantially. This will help you keep your state tax deduction low and keep your alternative minimum tax as low as possible.

Pay property taxes on the due date. Do not prepay your next installment before the end of the tax year. This will help keep your deductions low.

You should sell any exercised incentive stock options during the calendar year that you exercised them. Selling them the same year will make you subject to the regular tax but not the alternative minimum tax. If you exercise the options during the year but do not sell them, the value of the option will become income for the alternative minimum tax income.

 

Basics of Alternative Minimum Tax Explained

What is Alternative Minimum Tax?

The underlying purpose of alternative minimum tax is to provide protection to individuals who have higher earnings in situations where they might pay little or no amount as tax (because of the fact that a considerable part of their earnings is reduced by some deductions such as tax shelters, the portion of the profits that have not been taxed, etc.) The AMT can be regarded to be an alternative option for regular income tax, but the thing is that there is no reason to pay both the taxes at a time, instead one can pay the higher of these two. This system of tax was implemented in 1986. It is advised that if anyone comes across such situation where application of Alternative Minimum Tax is required then he must obtain legal advice and guidance from professional tax experts to manage the potential taxation liability that might occur.

 How is AMT calculated?

Every year the tax calculations of individuals are done on the basis of regular method of that takes into account preferential deductions and credit accounts. This number is then compared to another calculation where the tax calculation is subjected to a lower rate. So if the second calculation amounts to higher payment of taxes then the individual has file for it. The result that is brought forward by deriving the difference between the regular tax owing and the next calculation is called AMT.

If taxable amount of an individual comes under the purview of AMT, this condition can well be considered as a prepayment of future tax. The amount that has to be paid at the present situation against regular tax can be recovered over the next seven years. If the AMT is to be revived then it is absolutely necessary to have a running income in the said period (7 years) which will be taxable, otherwise the total amount paid as AMT will be lost.

One should be aware of such conditions which require the application of AMT beforehand otherwise it can create problems during the final preparation of tax returns. To avoid future problems that may arise due to the application of alternative taxation system one should take the help of tax advisors who can provide appropriate planning required for recovering or minimizing the effects of the AMT. However those who are enjoying tax deductions or discounts must be fully prepared for the imposition of this tax.