Matt Summitt for JPMS Cox writes: One of the most complicated and often misunderstood aspects of our tax code deals with the alternative minimum tax, more often referred to as AMT. An individual’s AMT liability is a separate calculation (reported on Form 6251) that is performed alongside the calculation of their regular tax liability. If the tax calculated on Form 6251 is less than your regular tax liability, then you do not owe any AMT. If, however, your AMT liability is greater than the regular tax as calculated on Form 1040, then the difference between the two will be added to line 45 on Form 1040 as an additional tax owed.
The entire premise behind the alternative minimum tax is to limit a taxpayer’s benefit for certain deductions. In short, alternative minimum tax law provides that some people (higher income taxpayers) are not entitled to certain deductions typically allowed under the regular tax system. These deductions are typically referred to as AMT preference items. A listing of the more common AMT preference items for individual taxpayers is as follows:
- Taxes included as an itemized deduction on Schedule A
- Miscellaneous deductions subject to the 2% threshold included on Schedule A
- Tax-free interest income from specified private activity bonds
- Long-term contracts (the difference between percentage of completion and completed contract method of accounting)
- Incentive stock option exercises
- Depreciation (differences between regular tax calculation and the calculation using AMT rules)
The starting point in calculating your AMT liability is line 41 of Form 1040, which is your adjusted gross income less your itemized deductions (or standard deduction). From here, the items listed above and any other preference items are included and your alternative minimum taxable income (or AMTI) is calculated. After considering these preference items, certain taxpayers are allowed an exemption that reduces AMTI. This exemption is the primary reason that many individuals in a lower income tax bracket do not have any AMT liability. The exemption amount for 2013 (if you were not subject to the exemption phase-out) was as follows:
- $80,800 for married filing joint taxpayers
- $51,900 for single or head of household taxpayers
- $40,400 for married filing separately taxpayers
One piece of good news about this form is that the AMT cannot touch the preferred tax rate on long-term capital gains and qualified dividends. A taxpayer is able to remove these items to ensure that they receive the benefit of these lower tax rates (15% or 20% for 2013, depending on your tax bracket). The rest of your income, however, is subject to the full force of the tax.
The calculation of your individual (or a corporation’s) AMT is similar to what is commonly referred to as a “flat” tax. A taxpayer’s AMTI less their applicable exemption is multiplied an applicable rate, as determined below:
- If AMTI less the applicable exemption is $179,500 or less for a married filing joint taxpayer ($89,750 for married filing separately), multiply this amount by 26%
- If AMTI less exemptions is $179,501 or more for the same, multiply this amount by 28% and then subtract $3,590 (or $1,795 if married filing separately)
The amount calculated is referred to as your tentative minimum tax. After this amount has been calculated, Form 6251 compares the amount calculated above to a taxpayer’s regular tax liability as reported on Form 1040, line 44. If your tentative minimum tax is more than your regular tax, then the difference between the two is required to be added on Form 1040 and is referred to as your AMT liability. At the end of the day, a taxpayer is required to pay the higher of their calculated AMT liability or regular tax liability.
As you can see, the process involved in calculating your AMT liability is not a simple one. This tax has often been known to cause quite a painful surprise come tax return filing time as many taxpayers who might have had an increase in income were not planning on losing benefit from some of the deductions they received in the past (like the state income tax deduction). Although it may not be possible to completely avoid paying any AMT, proper planning can assist in doing whatever possible to soften the blow.
Form 6251 – http://www.irs.gov/pub/irs-pdf/f6251.pdf
Form 1040 – http://www.irs.gov/pub/irs-pdf/f1040.pdf
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