Summit Financial Strategies Tax Insight – Alternative Minimum Tax (AMT)

It is projected that 94% of married couples, with kids, making $75,000-$100,000 will be subject to AMT for 2013 and beyond. Why? Because AMT has not been permanently adjusted for inflation. AMT, when passed in 1969 to fund the Vietnam War, was not indexed for inflation.

AMT was designed to tax the “rich” who were making over $200,000 per year. Please note, in 1969 the personal exemption was $600; today that same exemption is $3,700. Applying this proxy of inflation, AMT should only affect those making over $1.2 million today.

AMT is a parallel tax system that is separate and distinct from the income tax system. It attempts to ensure that wealthy individuals, trusts, estates, and corporations who benefit from certain tax advantages pay at least a minimum amount of tax.

All US income taxpayers are subject to AMT, but in practice, most taxpayers do not have an AMT liability because they are not subject to enough of the tax preferences items and adjustments that trigger AMT. Taxpayers must calculate their tax both ways and pay the greater of the two amounts; regular tax or AMT.

AMT is calculated by taking regular Adjusted Gross Income and adding or subtracting preference items. The most common adjustments and tax preference items include:

  • addition of personal exemptions
  • addition of the standard deduction, if claimed by the taxpayer
  • addition of itemized deductions claimed for state and local taxes (net of refunds), certain interest, most miscellaneous deductions, and part of medical expenses
  • accelerated depreciation of certain property
  • difference between gain and loss on the sale of property
  • addition of certain income from incentive stock options
  • change in certain passive activity loss deductions
  • addition of part of the deduction for certain intangible drilling costs
  • addition of tax-exempt interest on certain private activity bonds

Wealthy taxpayers currently are those whose taxable income for regular tax purposes, combined with these adjustments and tax preference items exceed certain limits:

  • married couples filing jointly taxable income is more than $69,950 or
  • single or head of household taxable income is $46,200, or
  • married filing a separate return taxable income is $34,975.

The AMT tax rate on income up to $175,000 ($87,500 for a married couple filing separately) is 26% and 28% for income over $175,000.┬áThe AMT is reported and paid with the regular income tax. It is subject to the same procedural rules, including filing requirements, payment of estimated taxes and record-keeping requirements. Other than coming up with more tax liability (sadly), you probably won’t notice any difference in your tax return.

Whether you are currently subject to AMT or not, to the extent possible avoid temporary spikes in income. By that we mean, if you have some discretion over the timing of income and/or deductions, contact your tax advisor as soon as possible to see what techniques could be used to reduce and/or avoid the AMT bite altogether. Time spent planning should help you to minimize the tax consequences of AMT.

If you are subject to AMT, all is not lost since a credit equal to the amount of AMT that is attributable to timing adjustments and preferences is available to offset regular tax liability in years after a taxpayer has been subject to the AMT.

To determine whether you may be required to pay the Alternative Minimum Tax consult with your income tax advisors or visit the IRS website at; http://www.irs.gov/businesses/small and use their AMT assistant. It will take a couple of minutes and will help you determine if you need to contact your tax advisor. Please note, it will be helpful to have a copy of your previous year Form 1040 available for reference.

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