Basics of Alternative Minimum Tax Explained
Sanjiv Gupta CPA - 9 years ago
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 a situation where the application of Alternative Minimum Tax is required then he must obtain legal advice and guidance from professional tax experts to manage the potential tax liability that might occur. How is AMT calculated?Every year the tax calculations of individuals are done on the basis of the regular method 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 filed 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 the 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 that 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.
Your Tax Credits and Deductions Are Expiring Soon
Sanjiv Gupta CPA - 8 years ago
The US congress and senate have a way of waiting until the last moment before making the many needed changes in legislation. In the year 2012, the country was just coming out of a deep international recession that affected the economy deeply. At that time, the congress and senate fell over themselves as they scrambled to try and save the normal Americans from feeling the effects of expiry on the tax breaks that they had gotten used to. This was then; however, the same situation seems to be in the offing at the end of this year. Most of the extensions that had been given earlier in 2012 are nearing their end with the collapse of this year, and as yet, few safety nets have been put in place to protect the common folk for when that time comes. Pundits point out that the delay in enacting changes in these laws or determining the direction that any fiscal interference from the government will take largely depends on the result of the presidential election. Well, the elections have come and passed, and the democrats had their way with regard to the presidency. As such, it is expected that such bills such as the Family and Business Tax Cut Certainty Act of 2012, which was approved by the Senate are going to sail through to the implementation stage.This is only half the solution; while the bill covers most of the extensions, there are some and albeit crucial parts of the bill that have not been looked at. This to some extent indicates the direction that congress may be leaning in relation to the tax breaks that have been the norm for a while now. The result will be a reaction that is part in full to what the market is used to. If this is the result, then it is expected that people are bound to tighten their belts, so to speak in the recent future.Initially, the bill took care of the tax provisions that affected individuals including restoring the alternative minimum tax (AMT) patch. The bill also took care of the deduction for state and local sales tax as well as the parity for employer-provided mass transit and parking benefits. Such provisions for these businesses include the extension of research and development credit in addition to the work opportunity credit. On the other hand, some of the things that this bill overlooked include the impending changes that are expected to happen on income, estate and capital gains tax rates.Recently, estimations by the Joint Committee on Taxation held that the renewal of this smaller list of provisions would have a net effect of costing more than $192 billion in loss of revenue from the fiscal year 2013 all the way to the fiscal year 2017. This is by no means a small number; however, the main question is “can the US economy handle such a loss at the moment?” If so, just what is the net return if such a move is undertaken?
Alternative Minimum Tax | Tax Planning
Sanjiv Gupta CPA - 7 years ago
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 taxpayers 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 taxesMortgage interestProperty taxExercising incentive stock options (not selling)Accelerated depreciationLosses or passive incomeDeduction for net operating lossInvestment expensesForeign tax creditsTax-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 SeparatelyThese 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 RatesThere 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.2014The 26% alternative minimum tax bracket ends, starting the 28% alternative minimum tax bracket at:Married Filing Separately: $91,250All other filing statuses: $182,5002013The 26% alternative minimum tax bracket ends, starting the 28% alternative minimum tax bracket at:Married Filing Separately: $89,750All other filing statuses: $179,500Do 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 an 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 taxable income.
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