- Days left

All About AMT: How a Tax Meant for the Wealthy Could Affect You

The AMT was designed to tax the wealthy, but instead hits the middle classTaxpayers love deductions and credits -- and why not? The deductions and credits in the Tax Code allow you to reduce your taxable income, and the amount of 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 got a huge property-tax deduction because of the exorbitant real estate taxes in your posh neighborhood? Or if you could itemize all your pricey miscellaneous expenses related to your high-paying job?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 $1.31 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. It was called the alternative minimum tax (AMT).

Since 1969, the AMT 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. 2010 is no exception.

For most of 2010, the income thresholds for AMT were extremely low. Finally, with just a couple of weeks to spare, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 boosted those income levels. Under the new law, for 2010, the exemption amount has increased to $72,450 for married couples filing jointly; $47,450 for individual taxpayers and $36,225 for married couples filing separately.

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 amount of stock options may trigger the AMT. This is an unwelcome trap for taxpayers who might have accepted stock options 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 you think you might be subject to the AMT, complete federal form 6251, Alternative Minimum Tax - Individuals. You can download a copy of the form from the IRS website using the forms and publications list. You can also use the online AMT Assistant.

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 can be a very difficult concept to try and calculate from scratch on a paper return.

Increase your money and finance knowledge from home

Advice for Recent College Grads

Prepare yourself for the "real world".

View Course »

How Financial Planners go Grocery Shopping

Learn to shop smart and save.

View Course »

TurboTax Articles

Ways To Increase Your Tax Refund You Never Thought About

Laying the groundwork for a tax refund requires some simple tax planning, a little research and some forethought. Reviewing your tax status, consulting your spouse when filling out your W-4s and taking advantage of several tax credits can help you increase your tax refund. TurboTax also can help decide which credits can get you the biggest refund.

What Extra Tax Deductions Should I Make Sure To Take?

The federal government offers tax deductions and credits to reduce taxable income under certain circumstances. There are several that are often overlooked, including deductions for job hunting, caregiver expenses for dependents and children while you work, a credit to reduce taxes for moderate- to low-income earners and the premium tax credit associated with the Affordable Care Act. TurboTax can help determine if you qualify for these credits and deductions.

8 Things You Think Are Tax Deductible That Aren't

There?s a fine line between looking to save money on your taxes and taking deductions that will raise eyebrows at the Internal Revenue Service. Some taxpayers are tripped up by expenses that they assume are tax deductions, but don?t qualify under IRS guidelines. Here are a dozen items that can lead to unpleasant surprises in case of an audit.

9 Things You Didn't Know Were Tax Deductions

Few realizations are more painful than realizing that you forgot to include a tax deduction that would have lowered your tax bill or increased your tax refund on your tax return. Here are some tax deductions that you shouldn't overlook.

Add a Comment

*0 / 3000 Character Maximum