Explaining the Alternative Minimum Tax

The Alternative Minimum Tax (AMT) has become a thorn in the side for many taxpayers. What began as a tax imposed on wealthy taxpayers to make sure they were paying their fair share of taxes has now become a runaway train affecting millions of taxpayers it was never intended to hit. While the earliest type of minimum tax was enacted in 1969, the AMT as we know it now came into effect in 1982.

The sad truth is that if you earn over $150,000 (approximately), live in a high tax state, pay high real estate taxes and have children, you are almost guaranteed to be subject to the AMT, and you really can’t do anything about it. If you do not deduct your state taxes and real estate taxes, you can probably avoid the AMT, but your regular tax liability will be higher and the net result will be the same. Rather than explain all of the components of the AMT, I find it more beneficial to illustrate the concept. In each column we will show how the tax is calculated.

Regular Tax AMT
Total income Total income
Less: Deductions such as personal exemptions, state taxes, real estate taxes and charitable contributions. Less: Deductions, but no deductions allowed for personal exemptions, taxes and miscellaneous itemized deductions.
Equals: Regular taxable income Equals: AMT Taxable income
Less: AMT exemption
Multiplied by your tax rate Multiplied by AMT tax rate (26% or 28%)
Equals: Your regular tax liability Equals: AMT tax liability

You pay the greater of the regular tax liability or the AMT tax liability

You or your tax preparer calculate the AMT alongside your regular tax when completing your tax return. The calculations differ in that when computing AMT you are not allowed certain deductions, most notably the deductions for your personal exemptions,  state income taxes, auto excise taxes and real estate taxes. You will pay the IRS whichever tax is greater between the regular tax and AMT.

The actual AMT calculation is quite complex and there are about 25 individual adjustments that can be made when computing the AMT such as depreciation, intangible drilling costs, incentive stock options and farm losses. But it is the loss of the deductions for taxes and personal exemptions that is making the AMT hit the type of taxpayers that it was never intended to.

There are some tactics that can be employed to shift income and deductions into later years that may help minimize the AMT impact, and you will want to be sure you work with a qualified tax professional in this area. In my practice, we run tax projections for our clients throughout the year so they will be in position to pay the least amount of taxes possible.

—-

On another note, Prince’s sudden death last month took the world by storm and while we still wait for the actual cause of death, something that has received less attention is the fact that he died without a will. And while it is safe to say that most adults have not done any estate planning, most don’t have $300+ million in assets. Prince’s estate will have to appoint a special administrator to probate the estate. This process will become a tax and accounting case study for certain.

Categories