- Days left

All about AMT -- why a tax meant for the wealthy could apply to you

Taxpayers love deductions and credits -- and why not? The number of deductions and credits in the Tax Code allows you to reduce your taxable income and tax due.

But what if you could deduct everything? What if your super pricey home meant your home mortgage interest deduction was sky high? Or if you paid exorbitant real estate taxes because of where you chose to live? Or if your miscellaneous itemized expenses related to your job were insanely expensive?
At one point, it was possible to be a wealthy taxpayer and take advantage of so many tax breaks in the Tax Code that you actually owed less tax than someone making a fraction of your salary.

In fact, according to the Washington Post, in 1967, 155 taxpayers with incomes over $200,000 did not pay any federal income taxes (indexed for inflation, $200,000 is roughly equivalent to $1.3 million today).

With that in mind, under the Nixon administration, a new tax item was introduced as part of the Tax Reform Act of 1969 to target those high-income households that appeared to benefit from too many tax breaks.

Since 1969, the Alternative Minimum Tax has changed very little. The income threshold is not indexed for inflation, so each year more and more taxpayers are affected. Congress hasn't bothered to fix the problem; instead, it has been pushing through an annual "patch" to up the amount at which the AMT kicks in.

For 2009, the exemption amount has increased just a few hundred dollars to $70,950 for married couples and $46,700 for individual taxpayers -- substantially less than the initial targets for the tax.

Generally, you may be subject to the AMT if your taxable income for "regular" tax purposes plus any adjustments and tax preference items results in an amount higher than the AMT exemption amount. If the AMT applies, you must separately figure a second tax by eliminating many deductions and credits. You pay whichever is higher -- the "regular" tax or the AMT.

Key triggers for the AMT include claiming multiple personal exemptions; high state and local taxes, including property tax, income tax and sales tax; interest on second mortgages; extraordinary medical expenses; unusually high miscellaneous itemized deductions; and participation in a tax shelter.

That said, perhaps the most well known tax item that causes you to be subject to the AMT is related to income, not deductions or credits. Exercising a significant incentive stock option (ISO) will almost certainly trigger the AMT. This is an unwelcome trap for taxpayers who might have accepted ISOs in lieu of cash; you'll want to take this into account when negotiating employment and compensation agreements.

If your income is above the exemption amount and think you might be subject to the AMT, complete form 6251, Alternative Minimum Tax - Individuals (you can download the form). You can also try an electronic version of the form on the IRS Web site.

The complexity of the AMT lends itself to the use of tax preparation software or a tax professional to help you complete your return; it's a very difficult concept to try and calculate from scratch on a paper return.

This is one of the reasons the National Taxpayer Advocate continues to refer to the AMT as one of the most serious issues facing taxpayers. The NTA urges repeal of the AMT, noting that 33 million taxpayers will be affected by the tax in 2010. Repeal of the AMT, however, does not appear to be a priority in Congress.

Increase your money and finance knowledge from home

How much house can I afford

Home buying 101, evaluating one of your most important financial decisions.

View Course »

Building Credit from Scratch

Start building credit...now.

View Course »

TurboTax Articles

What is IRS Form 8824: Like-Kind Exchange

Ordinarily, when you sell something for more than what you paid to get it, you have a capital gain; when you sell it for less than what you paid, you have a capital loss. Both can affect your taxes. But if you immediately buy a similar property to replace the one you sold, the tax code calls that a "like-kind exchange," and it lets you delay some or all of the tax effects. The Internal Revenue Service (IRS) uses Form 8824 for like-kind exchanges.

What are ABLE Accounts? Tax Benefits Explained

Achieving a Better Life Experience (ABLE) accounts allow the families of disabled young people to set aside money for their care in a way that earns special tax benefits. ABLE accounts work much like the so-called 529 accounts that families can use to save money for education; in fact, an ABLE account is really a special kind of 529.

What is IRS Form 8829: Expenses for Business Use of Your Home

One of the many benefits of working at home is that you can deduct legitimate expenses from your taxes. The downside is that since home office tax deductions are so easily abused, the Internal Revenue Service (IRS) tends to scrutinize them more closely than other parts of your tax return. However, if you are able to substantiate your home office deductions, you shouldn't be afraid to claim them. IRS Form 8829 helps you determine what you can and cannot claim.

What is IRS Form 8859: Carryforward of D.C. First-Time Homebuyer Credit

Form 8859 is a tax form that will never be used by the majority of taxpayers. However, if you live in the District of Columbia (D.C.), it could be the key to saving thousands of dollars on your taxes. While many first-time home purchasers in D.C. are entitled to a federal tax credit, Form 8859 calculates the amount of carry-forward credit you can use in future years, not the amount of your initial tax credit.

What is IRS Form 8379: Injured Spouse Allocation

The Internal Revenue Service (IRS) has the power to seize income tax refunds when a taxpayer owes certain debts, such as unpaid taxes or overdue child support. Sometimes, a married couple's joint tax refund will be seized because of a debt for which only one spouse is responsible. When that happens, the other spouse is said to be "injured" and can file Form 8379 to get at least some of the refund.

Add a Comment

*0 / 3000 Character Maximum