The Alternative Minimum Tax

You may not be aware of this, since income taxes are so complicated that not a lot of folks do much digging into the nuances, but there is another income tax rate that could affect you in certain circumstances.

This other income tax is called the Alternative Minimum Tax, or AMT.  This “alternative” tax applies when you have income above certain thresholds. Essentially it ensures that you pay a certain minimum amount of income tax if your deductions reduce your income so much that your ordinary income tax falls below the minimum applied by the AMT.  It gets pretty complicated, but I’ll go over the high points below.

Alternative Minimum Tax (AMT)

AMT has a separate set of rules for definitions of income and expenses, rules for accounting and timing, and exemptions and tax rates.  AMT limits the tax benefit of certain types of income and deductions, otherwise available to some taxpayers under the “normal” rules.

If you have a high income for the year but your taxable income is relatively low due to a large number of dependents, a high amount of your income is long-term capital gains, large Schedule A deductions, or a large amount of tax-free income from private activity bonds, you may be subject to AMT taxation.  Form 6251 is the appropriate form to use when determining if your income is subject to AMT.

Using Form 6251 you add to your taxable income those items that are used to determine the Alternative Minimum Taxable Income (AMTI), as explained below.

Starting with your taxable income (before exemptions) on line 41 of your Form 1040, you must make the several adjustments, adding back in many deductions from Schedule A (some medical expenses, mortgage interest, taxes, and miscellaneous deductions).  In addition to those additions, there are differences in the way that AMT rules define investment interest expense, depletion, stock option exercises, and quite a few specialized items that will only be of interest to business owners.

After these adjustments are made to your income, the AMT tax rates are applied. If the tax calculated is greater than the ordinary income tax, you’ll have to file with the AMT rates applied.

The IRS recently published their Tax Tip 2014-10 which lists out a few facts that may help you to understand the AMT.  Especially helpful is the AMT Assistant Tool, for which a link is provided below.  The complete text of the Tip is listed below:

What You Should Know about AMT

Have you ever wondered if the Alternative Minimum Tax applies to you? You may have to pay this tax if your income is above a certain amount. The AMT attempts to ensure that some individuals who claim certain tax benefits pay a minimum amount of tax.

Here are some things from the IRS that you should know about AMT:

1. You may have to pay the tax if your taxable income, plus certain adjustments, is more than the AMT exemption amount for your filing status. If your income is below this amount, you usually will not owe AMT.
2. The 2013 AMT exemption amounts for each filing status are:
   • Single and Head of Household = $51,900
   • Married Filing Joint and Qualifying Widow(er) = $80,800
   • Married Filing Separate = $40,400
3. The rules for AMT are more complex than the rules for regular income tax. The best way to make it easy on yourself is to use IRS e-file to prepare and file your tax return. E-file tax software will figure AMT for you if you owe it.
4. If you file a paper return, use the AMT Assistant tool on IRS.gov to find out if you may need to pay the tax.
5. If you owe AMT, you usually must file Form 6251, Alternative Minimum Tax – Individuals. Some taxpayers who owe AMT can file Form 1040A and use the AMT Worksheet in the instructions.

Visit IRS.gov to find out more about AMT. Also, see the Form 6251 instructions. You can get it at IRS.gov too or by calling 800-TAX-FORM (800-829-3676).