A Basic Overview of the AMT

One of the perennial tax issues that comes up is that of the alternative minimum tax, or the AMT. Originally, the AMT was instituted as a way to ensure that those with high incomes, and who might take advantage of excessive deductions, pay at minimum, what they should owe.

However, in the intervening years since the introduction of the AMT, it has expanded somewhat. In some cases, those with what could be considered a middle class income, and those who might not actually have a large amount of personal deductions.

How Does the AMT Work?

Basically, the AMT works by requiring those affected to pay the difference in what they owe. You figure out your taxes twice, by two different rules. First, you determine what you would owe following the “regular” rules of taxes. Next, you follow the rules of the AMT. This involves filling out a Form 6251.

After you have the results of both efforts, you compare them. If your “regular” tax is more than the AMT, you don’t have to pay it. However, if the AMT number is higher, you have to pay the difference. So, if your AMT tax shows that you should owe $52,000, but your “regular” tax comes out to $45,000, you need to pay your regular amount of $45,000, plus pay another $7,000 because of the AMT.

Really, you don’t know whether you owe the AMT unless you figure your taxes, by these two separate rules. Many people find that it’s much easier just to have an accountant figure it out, since going through Form 6251 can be quite tedious.

What Increases Your AMT Liability?

There are different items that contribute to AMT liability each year. And, of course, Congress regularly passes a “patch” that helps prevent those in the middle class from getting hit by the AMT. Fairmark offers a list of items that can result in AMT liability:

1. Personal exemptions: The more personal exemptions you have, the greater the likelihood that you will end up paying the AMT. Most of the time, simply taking exemptions for yourself, spouse, and children aren’t enough to trigger the AMT, but if you have enough personal exemptions can cause a problem.
2. State and local tax deductions: If you itemize to take state and local tax deductions, that could trigger the AMT. This is more likely if your state and local taxes are high, resulting in a bigger deduction.
3. Standard deduction: It seems strange to think that your standard deduction could trigger the AMT, but in some cases, according to Fairmark, it actually does. It’s not allowed under the AMT, so if you figure your taxes with a standard deduction, and then you figure with the AMT, and your regular taxes are lower because of the standard deduction, you could owe the AMT.
4. Medical expenses: The medical expenses allowed under the AMT are more restrictive. So if you claim a higher amount of medical expenses, it could mean that you owe the AMT.
5. Second mortgage interest: If you deduct the interest on a second mortgage, it could result in the AMT, since only the interest on a first mortgage is allowed under the alternative rules.
6. Different credits: It’s also worth noting that there are a number of credits that aren’t allowed under the AMT. If you have them in your regular taxes, but not in your AMT version, you might owe extra.
7. Miscellaneous deductions: Some deductions can only be taken under circumstances, and those with large incomes, and a large number of deductions, can easily get to the point where they result in you owing more by an AMT calculation than a regular calculation.
8. Long-term capital gains: A large capital gain can trigger the AMT, although you wouldn’t think it so, since the same treatment is available.
9. Incentive stock options: Without the proper planning, you could end up owing more because of the AMT.
10. Tax-exempt interest: Even though you may not have to pay taxes on some interest in a regular tax calculation, not all of that interest is exempt in an AMT calculation.

It’s also worth noting that some business deductions can trigger the AMT. Business use of your home is one of those deductions. Other factors can make it more likely that you will be subject to the AMT, including a gross income that exceeds $100,000 a year.

Make sure you consider the possibility of owing the AMT. You won’t know until you do the calculations, and until the patch is figured. Many agree that something needs to be done about the AMT, but it doesn’t seem like a solution will be forthcoming anytime soon.