Calculating Alternative Minimum Tax

You got a raise and now you have to calculate AMT on top of your regular tax!

As if the tax code weren’t complicated enough, many taxpayers have to worry about calculating the Alternative Minimum Tax (AMT) on top of their regular tax liability.

What is the Alternative Minimum Tax?

The AMT is a separate parallel system of taxation that was originally intended to make sure wealthy taxpayers didn’t take too many tax loopholes, thus avoiding their fair share. In other words, it was a tax system designed to make things “fairer”. In recent years, however, it has caught many middle-class taxpayers in its net. This, you will remember, was a point of dispute during the fiscal cliff controversy last December. Well, Congress decided to raise the AMT exemption rate and peg it to inflation.

The AMT  The Alternative Minimum Tax sometimes comes up with a higher liability by excluding many of the ‘loopholes’ of the regular tax system. Normally you can offset your tax liability with various exemptions, deductions, and credits. It’s essentially a flat tax that doesn’t allow you to take the standard deduction, personal exemptions, or certain itemized deductions. On top of this, you have to add in some income that is excluded from regular tax. This means AMT can add up to be significantly higher than what your regular tax is.

2015 AMT Exemption Amounts:

Thankfully there are exemption amounts preventing low to medium-income households from having to worry about the Alternative Minimum Tax. These amounts will automatically adjust each tax year with inflation. If your income is less than the amounts listed below for 2015, you are exempt from the AMT:

• Single – $53,600
• Married filing jointly – $83,400
• Married filing separately – $41,700
• Head of Household- $53,600

Once you fall above the exemption amount, it’s a lot harder to determine whether you have to calculate AMT. Here are some of the things that could cause you to have to pay AMT:

• 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

If you want a more definitive answer about whether or not you have to bother with the AMT, the IRS provides a helpful little AMT Assistant on its website. Answer a few questions from the tax return you are working on and then the Assistant will either tell you that you don’t owe AMT or that you need to complete Form 6251 (see below).

How to calculate AMT

If you’re preparing your own taxes, here’s the way it works. You have to calculate your tax liability under both the regular tax system and the separate Alternative Minimum Tax system.

Before you can set about calculating AMT, you must first calculate your adjusted gross income on your regular tax return. If you claim the standard deduction, you can find your AGI on line 38 of your 1040. If you itemize your deductions (which you should do before trying to figure out AMT) you can find AGI on line 41 of your 1040.

Use Form 6251 [Alternative Minimum Tax – Individuals] to calculate your tax liability under the alternate system.

Trying to Avoid the Alternative Minimum Tax?

Escaping the Alternative Minimum Tax is not easy. I mean, it was created because taxpayers were abusing deductions and tax breaks available (legally…but still…). However, there are certain measures to take that can lessen the impact of the AMT on your tax bill.

1. If you accumulate employee business expenses over the year that your employer refuses to reimburse you for (and you know that these expenses are causing you to pay the AMT), negotiate with your employer. It may be better off to have your employer pay some of these expenses in exchange for a lower salary. Mention to your employer that (s)he will save on payroll taxes, workers’ compensation insurance, and in some cases liability insurance premiums. In turn, you will reduce your taxable income and possibly avoid the AMT altogether!
2. Sign up for a pre-tax medical deduction plan if your employer offers it. Your salary will be reduced BUT you can pay your medical expenses on a pre-tax basis which will reduce your AMT and regular tax too!
3. In a year that you have to pay the AMT, don’t bother prepaying real estate or fourth-quarter state estimated tax payments in December. There is absolutely no benefit from paying these taxes in a year that you are subject to the Alternative Minimum Tax.

When it doubt, use onlinetax software!

Trying to calculate AMT by yourself using just the forms and instructions provided by the IRS is incredibly difficult. Instead, complete your return with an online tax program like PriorTax. PriorTax will automatically figure out whether you need to pay AMT.

If you need to get caught up on a previous year tax return, you can do so with PriorTax. Starting in January, you’ll be use PriorTax to e-file your 2015 Tax Return!

Updated February 2016

This entry was posted on Friday, March 8th, 2013 at 4:36 pm and is filed under Tax Tips and Tricks. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.