Many provisions of the Internal Revenue Code are complicated. Proper interpretation of the rules and regulations contained in these provisions requires the assistance of an experienced and knowledgeable tax professional. The second part of our series about the most confusing provisions of the Internal Revenue Code addresses everyone’s favorite, the alternative minimum tax.
Why Is It Confusing?
- The AMT doesn’t seem to achieve its purpose
- Taxpayers have to compute two taxes
- The computation of the AMT itself is enormously long and complicated
The AMT is a second, shadow tax system originally designed to make sure more affluent taxpayers with extraordinary tax shelters or schemes pay some minimal tax. The alternative minimum tax (AMT) applies to taxpayers with high levels of income by limiting certain benefits and ensuring that these taxpayers pay at least a minimum amount of tax. If the AMT is applicable, the affected taxpayer may lose a significant number of credits or deductions he or she would normally receive if the AMT didn’t apply.
Many critics of the AMT believe that it currently fails to achieve its underlying purpose. Why? It typically affects mostly middle and upper middle-income taxpayers who utilize large state and local tax deductions and/or exemptions for children, rather than those it’s supposed to affect, taxpayers in the high-income classes. Congress estimates that the alternate minimum tax will generate $385 billion in revenue over the next ten years, which is a substantial amount of money. If the AMT is repealed, how will the federal government replace this revenue?
Currently, many taxpayers have to complete AMT forms which require more than fifty steps to complete, such as Form 6251 and Form 8801. The AMT requires that taxpayers calculate their tax liability twice, once under the regular income tax rules, and once under the AMT rules, and pay whichever is higher. For individuals subject to the AMT, taxable income up to $175,000 is taxed at a 26% rate and taxable income in excess of $175,000 is taxed at a 28% rate.
Another problem with AMT is that it disallows many deductions and other tax breaks that many taxpayers earning less than $200,000 are allowed to take under the regular income tax rules. Households considered not to be wealthy are the most vulnerable to the AMT tax and typically live in a state with high tax rates like New York.
The AMT does not permit the deduction of state and local income taxes or property taxes, unlike the regular tax rules, meaning that those taxpayers in states with high state and local taxes like New York and California are particularly vulnerable to it. If you have a big family, the AMT is costly since you may take a personal exemption for each of your children under the regular tax rules, but not under the AMT rules.
Certain stated events on a tax return may trigger the AMT, such as taxpayers that claim a large number of personal exemptions. A large deduction for payment of state and local taxes, medical expenses, and unreimbursed employee expenses will also potentially trigger the AMT. The exercise of incentive stock options (ISOs), long-term capital gains, too many tax credits, and interest on a second mortgage are other triggers for the tax.
The AMT is calculated as the excess of the tentative minimum tax over the regular tax. Both the tentative minimum tax and the regular tax are figured separately. A taxpayer only owes the AMT if the tentative minimum tax is greater than the regular tax. Computing the tentative minimum tax is a lengthy and complicated process that typically necessitates the assistance of a knowledgeable tax professional.
If you are not liable for AMT this year, but you paid AMT in one or more previous years, you may be eligible to take a special minimum tax credit against your regular tax this year. An experienced tax professional may guide you this process. If you have any questions about whether you may be subject to the alternate minimum tax and how it affects the payment of your taxes, call The Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
