You may not understand the Alternative Minimum Tax and its exemption but it’s not a good idea to ignore the AMT. The AMT is a tax on top of a tax…it’s additional tax above and beyond your income tax. You see, back in the 60s the IRS saw lots of wealthy taxpayers using a myriad of loopholes and tax deductions to lower their tax bills so significantly they realized they had to do something. The Alternative Minimum Tax was established in 1969 to prevent wealthy taxpayers from ducking out on income taxes. Oh, did you deduct so much you don’t owe any taxes, well take that…the AMT. If you ignore it and you owed it, you’ll get a letter from the IRS, complete with penalties and interest.
To make things fair, the IRS created the Alternative Minimum Tax exemption. If you make under a certain amount of annual income, then you are not subject to the AMT. The only thing is, it’s not quite as simple as it looks to figure out whether your income falls below the exemption amount.
That’s because you have to calculate your AMT income first, and then see how it measures up to the Alternative Minimum Tax exemption amount. Luckily, there’s an AMT Assistant, an online tool run by the IRS to help you figure out whether you have to pay the AMT. To figure your AMT income, you will be stripping away certain deductions that had lowered your taxable income. Yup, as we said before, the IRS giveth and the IRS taketh away. These are the deductions that won’t count in your AMT income:
- interest on a second mortgage
- personal exemptions
- taxes paid to non-federal governments (state, local etc)
- various itemized deductions
- some medical expenses
After calculating your AMT income, which includes stripping away certain deductions mentioned above plus a number of other calculations, you will arrive at your AMT income. If you really want to know how it works, see IRS Form 6251. It’s a complex-looking form, and you only need to fill it out and submit it if you truly are liable for the AMT. Use the AMT Assistant first to see if you even have to fill out Form 6251.
The Alternative Minimum Tax Exemption
Here’s where the Alternative Minimum Tax exemption comes in. It’s currently around $50,600 give or take a few hundred dollars. The exemption amount is now annually adjusted for inflation, as of 2012. Before that, it was not adjusted for inflation so the exemption amount stayed the same…so with inflation more an more taxpayers were moving into the range of having to pay the AMT. The AMT was ensnaring lots of middle class taxpayers, which was never the intent.