Friday, December 28, 2012

Alternative Minimum Tax or AMT

Not surprising at all, I have a question on what is AMT. Alternative Minimum Tax or AMT was created as a way to ensure that taxpayers pay at least a minimum amount of tax. Over the years the tax laws have changed so that there is a large segment that are not subject to this minimum tax but with the roll into 2013, the AMT is something that the majority of us will now need to be aware of and concerned with. A good tax preparer or accountant can help you with this. The AMT has a completely different set of calculations than the regular tax. For the regular tax, you add up your total income, subtract out various deductions and personal exemptions, then calculate the tax. Against the regular tax you can claim various credits to reduce your tax even further. The AMT, however, does not allow the standard deduction, personal exemptions, or certain itemized deductions. Additionally, some income which is not subject to the regular tax is included in the AMT calculations. Your tax under AMT rules may be higher than your tax under regular tax rules.

Some adjustments that many of us use in preparing our taxes that can make you subject to the AMT are:

itemized deductions for state and local taxes

medical expenses

other miscellaneous expenses

mortgage interest on home equity debt

accelerated depreciation

exercising (but not selling) incentive stock options

tax-exempt interest from private activity bonds

passive income or losses

net operating loss deduction

foreign tax credits

exercise of stock options and

investment expenses

This is not all inclusive but it is a list of the primary drivers.

The AMT will impact more of the populations as stated in the previous post (see below). If nothing changes and the tax breaks expire and the AMT is adjusted as expected, the exemptions will go from $48,450 to $33,750 for single and head of household filers, from $74,450 to $45,000 for married people filing jointly and for qualifying widows or widowers, and from $37,225 to $22,500 for married people filing separately.

As an example if you made $110,000 and then deducted out $50,000 in various approved deductions, you may find yourself with $60,000 in taxable income and in a 15% tax bracket and paying $9,000 in taxes. With the AMT (this is an oversimplification but gives you an idea of what the difference might be) you would get your exemption of $45,000 and let's say $10,000 in certain allowed deductions and you still end up with $55,000 taxable income for the AMT. Your AMT tax would be 26% which means that you would pay $14,300in taxes, an increase of $5,300 or 58% more tax paid.

You can get credit in future years for paying the AMT but as you can see, this can have a significant impact to the bottom line, especially when added to the expiring tax cuts.

Also remember, ALL OF THIS IS SUBJECT TO CHANGE as our illustrious leaders negotiate the nations debt crises with our tax dollars.

Source: Code Section 55(d)(1). Lower exemption levels mean that more taxpayers will be subject to the alternative minimum tax calculations.

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