Don’t let the alternative minimum tax catch you by surprise.
The Alternative Minimum Tax (AMT) was created in 1969 to keep a small number of wealthy taxpayers from using tax loopholes to avoid paying any tax at all.
Instead of closing the loopholes, Congress came up with a plan to calculate a person’s tax two different ways – once with the traditional tax system and once with a special “alternative” system.
The taxpayer pays the higher of the two results. As you may imagine, this double system can be complex and confusing.
Originally the system didn’t bother many people as it only applied to especially well-off taxpayers. However, the AMT amounts did not keep up with inflation, and unfortunately, quickly began to affect more and more Americans.
Here’s how to know if it could affect you and what you can do about it.
1. If your income is less than $53,600 in 2015, you generally don’t have to pay AMT.
A certain amount of income per year is exempt from the AMT. This is called your exemption. If your income is less than the exemption, you generally don’t have to worry about the AMT.
For 2015, the AMT exemption amounts for each tax filing status are:
|Married filing jointly||$83,400|
|Married filing separately||$41,700|
|Head of Household||$53,600|
Your income for this purpose is calculated from your adjusted gross income, with certain changes required by the AMT. It’s best to use these amounts as a rule of thumb for determining whether the AMT may apply to you.
2. A few common tax items do not affect the AMT.
Some items are deductible for the regular income tax, but not deductible for the AMT.
For example, the standard deduction reduces your standard tax amount, but not the AMT. Itemized deductions for state and local income tax, real estate taxes and employee business expenses are also not deductible against the AMT.
Additionally, personal exemptions are not accepted when calculating your AMT. In tax year 2015, personal exemptions are $4,000 per qualifying person.
If you claim exemptions for two adults and three children, your exemptions could equal $20,000 (5 X $4,000).
However, that doesn’t automatically mean these deductions and exemptions won’t do you any good. The AMT uses its own set of tax rates, therefore your total AMT may still be lower than the regular income tax amount.
Remember, you pay the amount is that is highest between the regular income tax and the AMT.
Unless you have significant deductions and other tax preference items not allowed by the AMT, you probably still only owe regular income tax.
3. You may need to file Form 6251 if you have specific AMT items.
If you need to report any of the following items on your tax return, you must file Form 6251, Alternative Minimum Tax, even if you do not owe AMT.
- Accelerated depreciation
- Investment interest expense on Form 4952
- Home mortgage interest on a loan that you did not use to buy, build or improve your home.
Other less common items include Section 1202 exclusions, intangible drilling, circulation, research, experimental, or mining costs, tax-exempt interest from private activity bonds, and so on.
If Form 6251 is required, TaxAct will populate the form based on your tax items.
4. A little planning can help you avoid the AMT.
The best way to plan ahead for the AMT is to carefully read your tax return every year, including Form 6251.
Your strategy depends on your income, and the type of tax benefits that are triggering the AMT in your case. For example, if accelerated depreciation deductions cause you to pay AMT, you may want to choose a different method of depreciation.
Simply knowing how the AMT works can help you make better tax decisions. If you have itemized deductions close to the amount of your standard deduction, you may be better off taking the itemized deductions to avoid the AMT because the standard deduction is not allowed.
TaxAct can help you determine if itemizing or taking the standard deduction will result in a lower tax bill.
If you are subject to the AMT in some years but not in others, try to time deductible expenses for the years in which you get the most tax benefit.
5. If you pay AMT, you may get a credit later.
Some of the tax items that affect the AMT are what the IRS calls “deferrals.” These items “defer” tax under the regular tax system rather than simply lowering it within in a given year.
For example, accelerated depreciation lets you take depreciation deductions early on within an asset’s life, and ultimately defers any tax liabilities to later years. Once the depreciation of an asset has been recognized, it is no longer available to shelter taxable income in the years that follow.
The IRS makes up for this in the following years by giving you an AMT credit when applicable. TaxAct can help calculate potential AMT amounts available to you on Form 8801, Credit for Prior Year Minimum Tax.
6. The AMT is complicated, but TaxAct does the hard work.
TaxAct can help determine if you’re required to pay the AMT when you follow its guided Q&A interview. If Form 6251 is needed to finish your tax return, TaxAct will complete the form using the information you provided.
If you used a tax professional or other tax software products in previous years, you can find Form 6251 in your return and see how the AMT affected you.