Do You Have to Pay AMT? Eight Triggers to Watch Out For
Mar 10th 2011 5:00PM
Updated Mar 10th 2011 6:22PM
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.The point of the AMT is to ensure that anyone who benefits from certain tax advantages pays at least a minimum amount of tax. Under the AMT rules, you may be subject to the AMT if your taxable income as figured under the "regular" tax rules plus any adjustments and tax preference items gives you a higher amount than the AMT exemption amount. If the AMT applies to you, you must separately figure a second tax by eliminating many deductions and credits. You pay whichever amount is higher -- the "regular" income tax or the AMT (spoiler alert: it tends to be the AMT).
So what items of adjustments and tax preferences should you be on the lookout for? Here are a few tax moves that may trigger AMT:
1. Claiming a High Number of Personal Exemptions
The more exemptions you claim, the more likely it is you'll have AMT liability.
2. Significant State and Local Taxes
The point of the AMT is to cancel out disproportionately high deductions. This means if your state or local income or property taxes are high, you're more likely to be subject to the AMT. Taxpayers in traditionally high tax states such as California, New Jersey and New York tend to pay more AMT than taxpayers in other states.
3. High Levels of Medical Expenses
Since medical expenses push your itemized deductions higher, you may be subject to the AMT if you had a particularly significant amount of medical expenses in one year.
4. Lots of Unreimbursed Employee Expenses
Again, any expense that increases your itemized deductions can result in subjecting you to AMT. If you have a year in which you incurred a lot of unreimbursed employee expenses that were disproportionate to your income, you may be subject to the AMT. You'll have a similar result for other miscellaneous itemized deductions.
5. Exercise of incentive stock options (ISOs)
For years in the 1990s, the exercise of ISOs was nearly a guarantee that you'd be subject to AMT. That's changed a little as the exemption has crept up, but the danger is still there (the same analysis doesn't apply to sales of ISOs).
6. Long-Term Capital Gains
Long-term capital gain is better than ordinary income, right? So it's always better to have long-term capital gains, right? Not necessarily. A large capital gain reduces or eliminates the AMT exemption amount, which can result in your having to pay more tax.
7. Claiming Too Many Tax Credits
Increasing the amount of your tax credits tends to produce a better result than increasing your deductions. This is because credits reduce the amount of actual tax due, whereas deductions reduce the amount of taxable income. But credits do have a downside: The more credits you claim, the more likely it is you'll be subject to AMT.
8. Interest on a Second Mortgage
Interest you pay on a second mortgage that you don't use to improve your personal residence cannot be deducted under the AMT rules. This means that taxpayers who relied on a second mortgage or home equity line of credit (HELOC) to consolidate debts may be out of luck.
This list isn't meant to be exhaustive, just to get you thinking about what items on your tax returns might result in AMT. If you're beginning to think that the AMT is more complicated than you thought, you're not alone.
If you think the AMT might apply to you and you're not sure, try using the IRS AMT Assistant or consult with your tax professional. You can't always avoid the AMT, but there are planning techniques you can use to mitigate the consequences to you come Tax Day.