Facts about the Alternative Minimum Tax (AMT)

Posted by Bruce Mc on May 27, 2011 in AMT | 0 comments

The Alternative Minimum Tax attempts to ensure that anyone who benefits from certain tax advantages pays at least a minimum amount of tax. The AMT provides an alternative set of rules for calculating your income tax. In general, these rules should determine the minimum amount of tax that someone with your income should be required to pay. If your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax.

Here are six facts the Internal Revenue Service wants you to know about the AMT and changes for tax year 2010.

1. Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. These benefits can drastically reduce some taxpayers’ tax obligations. Congress created the AMT in 1969, targeting higher income taxpayers who could claim so many deductions they owed little or no income tax.
2. Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.
3. You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.
4. The AMT exemption amounts are set by law for each filing status
5. For tax year 2010, Congress raised the AMT exemption amounts to the following levels: $72,450 for a married couple filing a joint return and qualifying widows and widowers; $47,450 for singles and heads of household; $36,225 for a married person filing separately.
6. The minimum AMT exemption amount for a child whose unearned income is taxed at the parents’ tax rate has increased to $6,700 for 2010.

If you want further information on the AMT and your tax situation, please contact my office.

How do I know if I have to worry about the AMT?

Posted by Bruce Mc on Nov 19, 2009 in AMT, Information, Opinions | 0 comments

          One of the big problems with the AMT, there’s no good answer to this common question. You can owe AMT liability due to any number of reason/s. Could be just one thing, could be a lot of little things. Some things that can contribute to an AMT liability are mundane items that appear on many tax returns. (See this list Top 10 Things that Cause AMT Liability.)

          If you use computer software to prepare your tax return, the program should (I would hope) be able to do the AMT calculations for you. If you’re preparing your return by hand, the only way to know for sure is to fill out IRS Form 6251 – a very laborious process, on that I charge almost $80.00 for, and that price is adjusted (usually up) almost every time.

         The best way to understand the alternative minimum tax liability is to see how it’s calculated. So, here’s what you do.

         First, you figure the amount of tax you would owe under the different rules. What’s different about these rules? Roughly speaking, there are three things:

1. Various tax benefits that are available under the regular tax are reduced or eliminated.
2. You get a special deduction called the AMT exemption, which is designed to prevent the AMT from applying to taxpayers with modest income. This deduction phases out when your income reaches higher levels, a fact that causes significant problems with the alternative minimum tax.
3. You calculate the tax using AMT rates, which start at 26% and move to 28% at higher income levels. By comparison, the regular tax rates start at 10% and then move through a series of steps to a high of 35%.

          The result of this calculation is the amount of income tax you would owe under this “alternative” system of tax.

          Okay, got that number? Now then, compare this “tax” with your regular tax. If the regular tax is higher, you don’t owe any AMT. However, if the regular tax is lower, the difference between the two taxes is the amount of AMT you have to pay.

         You should definitely run the numbers if your gross income is above $75,000 and you have write-offs for personal exemptions, taxes and home-equity loan interest. if your income is over $150,000, run the numbers just because.

        Running the numbers means filling out Form 6251. In effect, you are simply adding back some tax deductions and income exclusions to your regular taxable income to arrive at your new alternative minimum taxable income (AMTI).

“Here is where the middle class gets screwed by the goat. If you are planning on doing all this on your own please call a tax pro for some guidance and a better understanding.”

         The AMT form has quite a few other pluses and minuses, but you can probably ignore them unless you own a business, rental properties or interests in partnerships or S corporations. If you do, you may need a tax pro to prepare at least the Form 6251 part of your return for you.

         Finally, you get to deduct the AMT exemption however, this exemption is reduced by 25 cents for each dollar of AMT taxable income above $150,000 for couples ($112,500 for singles and $75,000 for married filing separate status), and it’s not adjusted for inflation, which is one of the reasons why more people owe the AMT every year.

         After the exemption (if any) has been deducted, the result is subject to AMT rates. Again, the AMT brackets are not adjusted for inflation, which causes much greater exposure to the tax as the years go by. If the AMT exceeds your regular tax, you have to pay the greater amount. Basically, the AMT is just more tax, above and beyond your regular tax. Technically, the AMT is just the liability over and above the regular tax, and this figure is entered on page 2 of Form 1040.

Other notes:

         To calculate and report your AMT liability you need to fill out Form 6251, Alternative Minimum Tax – Individuals. If you use this form by all means please read the instructions.

         You’re required to take your AMT liability into account in determining how much estimated tax you pay. For information about estimated tax payments, see this Guide to Estimated Tax.

A brief overview of the alternative minimum tax (AMT).

Posted by Bruce Mc on Nov 17, 2009 in AMT, History, Opinions, Things forgotten | 0 comments

          The Alternative Minimum Tax (or AMT) is an extra tax some people have to pay on top of their regular income tax. Okay that sounds pretty messed up, doesn’t it?

          In recent years, the AMT has been under increased attention. Why? Well, put simply, because the AMT is not cataloged or set up for inflation, thus because of recent tax cuts, an increasing number of middle-income taxpayers have been finding themselves subject to this tax. Until recently, the AMT affected less than 1% of all individual taxpayers. However, since the year 2000, the AMT has steadily grown, hitting roughly 3% of all taxpayers in 2005.  Moreover, if left unchanged, the AMT will penalize nearly 20% of taxpayers by 2010. Almost 95% of all married filing joint couples. 

          The number of taxpayers affected by the Alternative Minimum Tax (AMT) is expected to exceed 30 million in 2010. Now that is really messed up. 

          So, lets back up a bit further. The original idea behind the AMT was to prevent people with very high incomes from using special tax benefits to pay little or no tax. The name comes from the way the tax works. The AMT provides an alternative set of rules for calculating your income tax. In theory, these rules determine a minimum amount of tax that someone with your income should be required to pay. If you’re already paying at least that much because of the “regular” income tax, you don’t have to bother with the AMT. Sadly on the other side of this issue, if your regular tax falls below this “minimum”, you have to make up the difference by paying an alternative minimum tax.

Okay, it is still messed up.

Some History

          The AMT was introduced by the Tax Reform Act of 1969 and became operative in 1970. Why Was the AMT Enacted? Well, Congress enacted the AMT in 1969 following testimony by the Secretary of the Treasury that 155 people with adjusted gross income above $200,000 during tax year 1967 (In inflation-adjusted terms, their (the 155 people) 1967 incomes would be roughly $1.5 to 2 million in today’s dollars.), had paid zero federal income tax on their 1967 tax returns.

           This tax avoidance by these “few” high-income taxpayers was widely perceived as unfair. Rather than directly addressing the problem by eliminating their deductions and credits in the tax code that were leading to the tax avoidance in the first place, Congress laid an additional layer of complexity over the regular income tax in the form of the AMT. 

Again, It was intended to target 155 high-income households.

           The Tax Equity and Fiscal Responsibility Act of 1982 holds the foundation for the present day individual alternative minimum tax, somewhat. Enough anyway for this article.

          The alternative minimum tax operates in effect as a parallel tax system, with its own definition of taxable income, exemptions, and tax rates. Taxpayers compute tax owed under the “regular” and AMT systems and are liable for whichever is higher. The AMT system has in general a broader definition of taxable income, a larger exemption, and lower tax rates than the regular system.

         In 1969 the minimum tax was a 10 percent flat rate. Over the years the AMT has evolved and increased in complexity. As of the latest revision, there is a two tier system: 26 percent and 28 percent for individuals.

          There is an AMT for those who owe personal income tax, and another for corporations owing corporate income tax. Only the AMT for those owing personal income tax is described here.

History of the Alternative Minimum Tax  

• Tax Reform Act of 1969 – Introduced the “add-on” minimum income tax of 10% in excess of an exemption of $30,000.
• Excise, Estate, and Gift Tax Adjustment Act of 1970 – Allowed deduction of the “unused regular tax carryover” from the base for the minimum tax.
• Revenue Act of 1971 – Imposed minor provisions regarding foreign income.
• Tax Reform Act of 1976 – Raised rate of minimum income tax to 15% and lowered exemption to $10,000 or half of regular taxes.
• Tax Reduction and Simplification Act of 1977 – Reduced minimum tax preference for intangible costs of drilling oil and gas wells.
• Revenue Act of 1978 – Introduced AMT alongside minimum income tax and moved certain itemized deductions and capital gains to AMT. AMT had graduated rates of 10%, 20%, and 25%, and an exemption of $20,000.
• Economic Recovery Tax Act of 1981 – Lowered AMT rates to correspond with reductions in rates of regular income tax.
• Tax Equity and Fiscal Responsibility Act of 1982 – Repealed “add-on” minimum tax. Made AMT rate a flat 20% of AMT income after exemptions of $30,000 for individuals and $40,000 for joint returns.
• Deficit Reduction Act of 1984 – Made minor changes concerning investment tax credit, intangible drilling costs, and other items.
• Tax Reform Act of 1986 – Raised AMT rate to 21%. Made high-income taxpayers subject to phase-out of exemptions. Increased number of tax preferences. Allowed an income tax credit for prior year AMT liability.
• Revenue Act of 1987 – Made technical corrections related to Tax Reform Act of 1986.
• Technical and Miscellaneous Revenue Act of 1988 – Made technical corrections related to Tax Reform Act of 1986.
• Omnibus Budget Reconciliation Act of 1989 – Made further technical amendments.
• Omnibus Budget Reconciliation Act of 1990 -  Raised AMT rate to 24%.
• Energy Policy Act of 1992 – Changes regarding intangible costs of drilling oil and gas wells.
• Omnibus Reconciliation Act of 1993 – Introduced graduated AMT rates of 26% and 28%. Increased exemption to $33,750 for individuals and $45,000 for joint returns. Changed rules about gains on stock of small businesses.
• Taxpayer Relief Act of 1997 – Changes regarding depreciation and farmers’ installment sales.
• Tax Technical Corrections Act of 1998 – Adjusted AMT for new capital gains rates.
• Tax Relief Extension Act of 1999 – Changed rules about nonrefundable credits.

My next post, I hope to cover a bit more of, how to know if you need to bother with this AMT thing, and go over a little bit about how it works.

“See ya’”