The alternative minimum tax or AMT started as an additional tax on those whose income rose above a certain amount. The AMT was created by the U.S. federal in 1969 after a realization that most high income earning households were hardly paying any tax following the regular tax guidelines.
Though the AMT has been through many changes since then, the purpose still is to prevent people from avoiding taxation. Today, the AMT operates as an alternative method for determining your income tax depending on how much money you earned that year or how many deductions you received. It serves as a minimum amount that must be paid despite one’s exemptions or deductions.
Do I Have to Pay the Alternative Minimum Tax?
Individual, married filers, and corporations may all be subjected to the AMT. However, just because the AMT applied in one tax year does not mean it applies every year thereafter to a taxpayer. Start with the standard income tax return to in determining whether the AMT applies.
Just as there are deductions in regular tax, there are a few in the AMT. However, there are less opportunities to reduce the tax in the AMT formula. The following are a list of examples of deduction differences in the AMT:
- There is no standard deduction in the AMT.
- There are no personal exemptions in the AMT.
- Under the AMT, medical expenses must exceed 10% of the income in order to claim the deduction rather than 7.5% in the regular tax formula.
- While investment interest may be deductible after adjustment in the AMT, non-business interest is not deductible.
How Do I Lessen or Avoid Paying the Alternative Minimum Tax?
- Maintaining an income below the income guideline for the AMT is one way. For example, taking a capital gains for the maximum amount in one year and paying the AMT may allow the taxpayer to avoid the AMT in subsequent years.
- Taking advantage of Individual Retirement Account or IRA contributions, home mortgage interest payments, and charitable deductions may help lower one’s AMT liability.
- If you are already paying a high amount in state and local taxes, you may be able to structure the previous years’ taxes into one payment so that they benefit your AMT liability even if there are penalties to a delayed lump sum payment.
- If you have substantial medical expenses but not quite at 10% of your income, try to arrange for a payment option that allows you to pay a larger amount in one tax year to take advantage of the deduction.
Where Can I Go for Help with Planning for the Alternative Minimum Tax?
Taxation is a complicated system and many taxpayers find it overwhelming to file each year. In order to maximize your savings and carefully plan for your tax liability, you should consider hiring a tax professional like an accountant. If you have issues with the IRS over the AMT and could potentially face legal repercussions, then you should contact a local tax attorney to find out what are your options.