What the Heck is the Alternative Minimum Tax?

by Miranda Marquit · 1 comment

Tax folder

Our country has a decades-long history of trying to make sure that high earners pay what is considered their fair share in taxes.

However, a long list of deductions is available, which allows many wealthier people to reduce what they pay in taxes. In order to reduce the deduction loopholes, another method of figuring tax — the alternative minimum tax (AMT) — was introduced.

Do You Owe the AMT?

In order to determine whether or not you owe the AMT, you need to figure out your taxes twice. At first, you determine your tax bill in the “regular” way. Next, you fill out Form 6251. This IRS form helps you determine what you would owe if you paid the AMT.

It’s important to understand that there are certain deductions that are ineligible as you calculate the AMT:

  • Personal exemptions
  • Standard deductions
  • Second mortgage interest
  • More restrictive medical deductions
  • More restrictive property tax deductions
  • State and local tax deductions
  • Miscellaneous itemized deductions

There are also certain credits that don’t figure in while you’re calculating the AMT. As you prepare to fill out Form 6251, realize that if you have a lot of itemized deductions, or if you claim a lot of credits, you might end up with AMT liability.

Once you’ve figured out your taxes both ways, you compare the numbers and pay the higher amount. If the amount you would owe under the AMT rules is less than what you owe with the “normal” method, you don’t pay the AMT. If the AMT calculation comes out higher than your regular taxes, you need to pay the difference.

What is the AMT Patch?

In years past, there’s been a lot of hoopla surrounding the AMT patch. This is because, for decades, Congress set the amount of income that triggered the AMT. However, as inflation took hold, many middle class families soon found themselves subject to the AMT — even though it was only supposed to affect the wealthy.

Congress had to regularly update the AMT, putting a “patch” on the law so that middle class families didn’t suddenly find themselves stuck with higher (and probably unaffordable) taxes. Every time the patch was about to expire, a great deal of wrangling and coverage accompanied the situation. Often, the patch was included with other legislation, in an attempt to get unpopular measures passed.

With the passage of the recent fiscal cliff tax deal, though, the issue of the patch has been rendered largely mute. The patch is now permanent, and it’s related to inflation. As inflation takes hold, the patch automatically follows suit and adjusts itself.

Most middle class taxpayers don’t have to worry about the AMT. But, if you’re starting to earn a little more, and if you have a lot of deductions and credits, you should consider it. Run the calculations yourself, or make sure your tax preparer figures out the difference.

What’s your experience with the AMT?

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