16 Feb Alternative Minimum Tax (AMT) Triggers and Tax Planning
Posted at 00:00h in Alternative Minimum Tax (AMT)
The Alternative Minimum Tax, or AMT, is a parallel tax system to the standard tax system. Every taxpayer is responsible for paying the higher of the regular tax or the alternative minimum tax. The difference between the two tax calculations is determined using IRS Form 6251 (pdf) and using Instructions for Form 6251. If the minimum tax is higher than your normal income tax, the difference between the two tax rates is added to your Form 1040 as an additional alternative minimum tax.
The AMT has a completely different set of calculations than the regular tax. It does not allow the standard deduction, personal exemptions, or certain itemized deductions. Also some income which is not subject to the regular tax is added for AMT purposes. Your tax under AMT rules may be higher than your tax under regular tax rules. When calculating the alternative minimum tax, various adjustments are made. Some income is added which is not subject to the regular tax. Some deductions are adjusted downwards or eliminated entirely. The following items may trigger an AMT liability:
Itemized deductions for state and local taxes, medical expenses, and miscellaneous expenses
Mortgage interest on home equity debt
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
This list is not comprehensive, but reflects the typical adjustments that can trigger an AMT liability. AMT Exemption Amounts for 2010 are:
$47,450 for single and head of household filers,
$72,450 for married people filing jointly and for qualifying widows or widowers, and
$36,225 for married people filing separately.
AMT Exemption Amounts for 2011 are:
$48,450 for single and head of household filers,
$74,450 for married people filing jointly and for qualifying widows or widowers, and
$37,225 for married people filing separately.
The exemption amounts mean that this amount of AMT taxable income is not subject to the AMT. Income over these amounts may be subject to AMT. Unlike the ordinary tax rates, the AMT has only two tax brackets. The AMT tax rate is assessed only on AMT income over the exemption amount. The AMT tax rates are:
26% on the first $175,000 of AMT taxable income, and
28% on the remainder of AMT taxable income
Quick Check to See if You are Subject to AMTThe Internal Revenue Service has an online calculator to help you figure out if you are subject to the alternative minimum tax. It’s called the AMT Assistant for Individuals.
Most software will compute the alternative minimum tax automatically. Individuals should review the actual tax form to understand which income or deductions are causing the AMT liability. For many taxpayers, deductions for state income tax, property tax and home equity interest and income from incentive stock options are the main causes.
AMT Tax Planning tips ….
Review your state tax withholding so that you pay in enough so you don’t owe but not enough that you substantially overpay. This will keep your state tax deduction to as low as possible, thereby keeping your AMT adjustments as small as possible.
Pay your property taxes when due instead of prepaying your next installment by the end of the year. Again, this will keep your deduction for state and local taxes as low as possible.
Sell exercised incentive stock options in the same year you exercise them. When you exercise & sell incentive stock options in the same year, you’ll be subject to the regular tax on the income but not the AMT. However, if you exercise but not sell, the value of the exercised options because income for AMT purposes.