What taxpayers need to know about the dreaded AMT
About 45 years ago, Congress enacted what's known as the alternative minimum tax (AMT), because some wealthy families were legally using so many deductions and tax breaks that they were paying no federal income taxes at all.
The AMT required these higher-income taxpayers to recalculate their tax liability without including many of the usual deductions and exemptions.
Although the AMT's original intent was to ensure the wealthiest earners paid some tax, it now ensnares a large number of taxpayers because the income threshold use for calculating the AMT hasn't kept pace with the growth of income reported by taxpayers. In 2011, about 4.3 million taxpayers paid $30.9 billion in additional income tax, with an average AMT per tax return of about $7,212, according to the Tax Policy Center.
How the AMT Works
If using certain tax deductions and exemptions would cause your regular income tax to fall below a minimum amount, then the AMT would kick in and increase your tax. With the AMT, you begin with your taxable income figured the regular way and then add back any adjustments and deductions that the AMT doesn't allow.
The most common disallowed deductions are for state income taxes, real property taxes, home equity loan interest and personal exemptions for dependents. This higher income amount is then reduced by the AMT exemption, which is $80,800 for joint filers and $51,900 for single filers.
The result is the alternative minimum taxable income, or AMTI, which is then multiplied by 26 percent for AMT income up to $179,500 in 2013 ($89,750 for married filing separately) and 28 percent for AMT income over that amount.
Taxpayers are required to recalculate their income tax under the AMT by completing Form 6251. If the AMT is more than the tax calculated the regular way, then the AMT in excess of your regular tax is reported on line 45 of form 1040.
Most tax-preparation software will automatically complete the Form 6251 and calculate the AMT for you. If you still prepare your own tax return on paper, the IRS provides an AMT Assistant for Individuals on its website.
Taxpayers whose returns are prepared by a professional may not even know they are paying additional tax under the AMT, if they don't carefully review their return. To find out if the AMT has affected you, check line 45. If that's the case, you'll find the additional amount owed there.
The bright side -- if there is any -- is that because of the new higher tax rates that apply to more folks with higher incomes, their tax figured the regular way will be more than their tax under the AMT. Also, growth of the number of folks that the AMT could affect in the future might slow because the amounts that apply for the AMT exemption and AMT income are now indexed for inflation, thanks to a "patch" included in the American Taxpayer Relief Act of 2012.
Finally, if you're not liable for the AMT this year, but you paid it in one or more previous years, you may be eligible to take a special minimum tax credit against your regular tax this year. This credit is for the AMT that was related to deferral items, which generate a credit for future years, as opposed to exclusion items which aren't deductible for AMT, and therefore are lost. To calculate the applicable credit, complete and attach Form 8801, Credit for Prior Year Minimum Tax - Individuals, Estates, and Trusts.
I've also written about what you might be able to do to avoid the AMT in a related post.