Neil Brown, a CFP has his take on the AMT, for The State he writes: The Alternative Minimum Tax was permanently extended this
year by the American Taxpayer Relief Act of 2012 after a decade of
legislative patches. Passed in the first days of 2013, it retroactively
applies to the 2012 tax year. Here’s a quick guide to understanding the current rules. The AMT is essentially a separate federal income tax system with its
own tax rates, and its own set of rules governing the recognition and
timing of income and expenses. If you’re subject to it, you have
to calculate your taxes twice – once under the regular tax system and
again under the AMT system. If your income tax liability under the
alternative is greater than your liability under the regular tax system,
the difference is reported as an additional tax on your federal income
tax return. If you’re subject to the AMT in one year, you may be
entitled to a credit that can be applied against regular tax liability
in future years.
Part of the problem with the AMT is that, without
doing some calculations, there’s no easy way to determine whether or
not you’re subject to the tax. Key “triggers” include the number of
personal exemptions you claim, your miscellaneous itemized deductions,
and your state and local tax deductions. So, for example, if you have a
large family and live in a high-tax state, there’s a good possibility
you might have to contend with the tax. IRS Form 1040 instructions
include a worksheet that may help you determine whether you’re subject
to the it (an electronic version of this worksheet is also available on
the IRS website), but you might need to complete IRS Form 6251 to know
completely.
It’s no easy task to calculate the AMT, in part
because of the number and seemingly disparate nature of the adjustments
that need to be made. Some of the more common adjustments are as
follows:
• The federal standard deduction, generally available
under the regular tax system if you don’t itemize deductions, is not
allowed for purposes of calculating the AMT. Nor can you take a
deduction for personal exemptions.
• Under the AMT calculation,
no deduction is allowed for state and local taxes paid, or for certain
miscellaneous itemized deductions. Your deduction for medical expenses
may also be reduced and you can only deduct qualifying residence
interest to the extent the loan proceeds are used to purchase, construct
or improve a principal residence.
• Under the regular tax
system, tax is generally deferred until you sell the acquired stock.
However, for AMT purposes, when you exercise an incentive stock option,
this does cause a change in your AMT calculations and possibly your tax.
While
the AMT takes away personal exemptions and a number of deductions, it
provides other specific exemptions. The amount of AMT exemption that
you’re entitled to depends on your filing status and your exemption
amount and begins to phase out once your taxable income exceeds a
certain threshold.
Under the AMT, the first $175,000 for 2012 of
your taxable income is taxed at a rate of 26 percent. If your filing
status is married filing separately, the 26 percent rate applies to your
first $87,500 in taxable income. Taxable income above this amount is
taxed at a flat rate of 28 percent.
Owing the alternative minimum
tax isn’t the end of the world, but it can be a very unpleasant
surprise. It also turns a number of traditional tax planning strategies –
such as accelerating deductions – on their heads, so it’s a good idea
to factor in the AMT before the end of the year, while there’s still
time to plan.
If you think you might be subject to the AMT, it may be worth sitting down to discuss your situation with a tax professional.
Life is a journey, plan for it.
Sunday, March 17, 2013
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