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What you can -- and can't -- do when the AMT bites

Financial Advisor Ray Martin sits down with MoneyWatch's Amey Stone to discuss the impetus for starting the Alternative Minimum Tax and the impact it's having on the American taxpayer
Financial Advisor Ray Martin sits down with M... 03:58

If you wrote a big check to Uncle Sam on April 15, it may well be because you had to pay the "dreaded AMT," or alternative minimum tax.

The AMT requires certain taxpayers to recalculate their tax liability without including many of the usual deductions and exemptions. If the AMT calculation is higher than the regular calculation, these taxpayers pay the larger amount.

The AMT's original intent was to ensure that wealthiest earners paid some income tax. But because the threshold hasn't adjusted upwards in line with inflation, the toll now ensnares a large number of taxpayers who, while well-off, aren't among the super-rich.

Taxpayers who live in high-tax states, have several children and who are reporting between $200,000 and $500,000 of adjusted gross income are much more likely to be subject to the AMT than other groups. Because of the new higher tax rates, folks with higher incomes are finding that their tax liability figured out the regular way will amount to more than their tax under the AMT. They are no longer subject to the AMT, in other words, but they are still paying more in taxes.

If you are subject to the AMT, I've written about steps you can take to avoid the AMT's bite. Most of these strategies are quite drastic -- move to a lower tax state, for example.

What may make more sense is to abandon any extra efforts you were making to maximize deductions. For example, it may not make sense for people subject to the AMT to use a home-equity line of credit for large purchases. Certain kinds of municipal bonds may not be tax-free if you are subject to the AMT.

These tax laws get complicated. Bottom line: If you are paying a lot in taxes due to the AMT and want to see what strategies are available to lessen the bite in 2014, check with a tax adviser.

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