The Alternative Minimum Tax, or AMT, requires taxpayers to refigure their income tax liability without many of the tax deductions and exemptions typically allowed under normal circumstances.
The AMT originally intended to ensure that a very small number of the wealthiest taxpayers paid some tax. But now it entraps millions of taxpayers because the income threshold originally used to calculate the AMT has not been increased at the same pace as taxpayer incomes. Today, approximately 5 million Americans pay about $35 billion in additional income tax, with an average AMT per tax return of about $7,000, according to the most recent data available.
How the AMT works
When you claim certain tax deductions and exemptions, this has the effect of reducing your regular income. If that reduces your tax liability too much, the AMT kicks in and causes you to owe this additional tax.
The AMT is a second tax calculation that expands the amount of your income that's taxable by adding back some items you deducted. It also adds back some tax-free income that's excluded when you figure your taxable income the regular way.
The most common deductions the AMT disallows are for state income taxes, real property taxes, home equity loan interest and personal exemptions for dependents. These items are added back to your taxable income, and then the resulting amount is reduced by the AMT exemption. The AMT income exemption amounts for 2014 tax returns are $82,100 for joint filers and $52,800 for single filers.
For 2014 tax returns, the AMT taxable income in excess of these exclusions is then multiplied by 26 percent for AMT income up to $182,500 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 under the regular way, then the AMT in excess of your regular tax is reported on line 45 of form 1040.
Most tax-preparation software programs such as Intuit's (INTU) TurboTax, will automatically complete the Form 6251 and calculate the AMT for you. If you still prepare your own tax return on paper, the IRS has an AMT Assistant available on its website.
If you don't prepare your own tax return and don't carefully review it, you may not even know you're paying additional AMT amount. So, the first thing to do is to check Line 45 of form 1040. If the AMT has been correctly calculated, you'll see the additional tax owed there.
How to reduce the AMT for 2014 taxes
The tax planning to reduce your AMT in future years involves reducing deductible expenses, not claiming certain exemptions, increasing income or a combination of these strategies. The objective is to increase your regular taxable income, so that your regular income tax is more than the AMT.
Even though doing this planning now will help only in 2015 and future years, you may still be able to some things to reduce what you'll owe under the AMT for 2014. For example:
- If you're self-employed, consider claiming the home office deduction using Form 8829 Expenses for Business Use of Home. Use this method instead of the Simplified Option because it will allow some of your real estate taxes to be deducted against the self-employment income. This could allow you to claim more of these deductions against your self-employed income, which isn't affected by the AMT.
- Don't claim dependent exemptions for your college-age children. That's because these exemptions would be disallowed under the AMT. Instead, have the children claim themselves on their own tax returns. They may also be eligible to claim additional education-related tax credits.
- If you have a taxable state tax refund that will be reported on your regular tax return, don't include it in your income for AMT purposes. Because you won't receive a corresponding deduction for these state taxes, they shouldn't be included in your AMT income.
Finally, you may be eligible to claim an AMT tax credit. If you don't owe the AMT this year, but you paid it in a previous year, you might be able to take a special AMT tax credit against your regular tax this year. To calculate and claim the applicable credit, complete and attach Form 8801 Credit for Prior Year Minimum Tax.