CARL WATTS & ASSOCIATES

May 16th, 2011

www.carlwatts.com
office@carlwatts.com
Washington DC
 tel/fax 202 350-9002
TOP
You certainly must have asked yourself what this is and where it comes from. The simple answer is that, while the tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain kinds of expenses, the alternative minimum tax (AMT) attempts to ensure that anyone who benefits from these tax advantages pays at least a minimum amount of tax.

The AMT is a separately figured tax that eliminates many deductions and credits, thus increasing tax liability for an individual who would otherwise pay less tax.

The alternative minimum tax began as a way to ensure that taxpayers with very high income, that may use special tax benefits to pay little or no tax, pay at least a minimum amount of 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 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 pay AMT. But if your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax.
Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.

The AMT has a completely different set of calculations than the regular tax. For the regular tax, you add up your total income, subtract out various deductions and personal exemptions, then calculate the tax. Against the regular tax you can claim various credits to reduce your tax even further. The AMT, however, does not allow the standard deduction, personal exemptions, or certain itemized deductions. Also some income which is not subject to the regular tax is added for AMT purposes.

Your tax under AMT rules may be higher than your tax under regular tax rules.

First you need to figure out the amount of tax you would owe under a different set of rules. Broadly speaking, three things are different about these rules:

  • Various tax benefits that are available under the regular tax are reduced or eliminated;
  • 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 under the alternative minimum tax;
  • 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%.
Alternative Minimum Tax
The result of this calculation is the amount of income tax you would owe under this "alternative" system of tax.

The rate of AMT varies by type of taxpayer. Through 2012, individuals, estates, and trusts are subject to the same rate of tax on long term capital gains for regular tax and AMT.

The AMT standard exemption amounts for 2011 are:

  • $48,450 for single and head of household filers,
  • $74,450 for married people filing jointly and for qualifying widows or widowers, and
  • $37,225 for married people filing separately.


The following items may trigger an AMT liability:

  • Itemized deductions for state and local taxes, medical expenses, and miscellaneous expenses;
  • Mortgage interest on home equity debt;
  • Accelerated depreciation;
  • Exercising (but not selling) incentive stock options;
  • Tax-exempt interest from private activity bonds;
  • Passive income or losses;
  • Net operating loss deduction;
  • Foreign tax credits;
  • Investment expenses.

If you paid AMT because of certain "timing items" such as exercising incentive stock options, you may be able to claim a special credit in later years.

If you awe AMT taxes you need to file Form 6251, Alternative Minimum Tax - Individuals.

Tax strategies to lower your alternative minimum tax can be tricky, but generally you can plan to:

Review your state tax withholding so that you pay in enough so you don't owe, but not enough that you substantially overpay. This will keep your state tax deduction to as low as possible, thereby keeping your AMT adjustments as small as possible.

Pay your property taxes when due instead of prepaying your next installment by the end of the year. Again, this will keep your deduction for state and local taxes as low as possible.

Sell exercised incentive stock options in the same year you exercise them. When you exercise & sell incentive stock options in the same year, you'll be subject to the regular tax on the income but not the AMT. However, if you exercise but not sell, the value of the exercised options becomes income for AMT purposes.

Best of all, of course, is to consult a tax professional for the most efficient strategies to suit your personal financial status.

Troubles viewing this message? View in browser online here