Under the Internal Revenue Code and the vast body of rules and regulations related thereto, certain tax benefits can significantly reduce the amount of taxes that a taxpayer may owe. The alternative minimum tax (AMT) applies to those taxpayers with high levels of income by limiting these benefits and ensuring that these taxpayers pay at least a minimum amount of tax. If the AMT applies to you, you may lose many credits or deductions you would normally receive if you didn’t have to pay the AMT.
Many taxpayers feel the AMT as it currently exists does not achieve its underlying purpose because it usually affects mostly middle and upper middle income taxpayers rather than those in the high-income classes. Over the next decade, Congress expects the alternate minimum tax to generate $385 billion in revenue. If it’s repealed, how will this revenue be replaced?
The AMT is a parallel income tax system in which taxpayers must calculate their tax liability twice, once under the regular income tax rules, and once under the AMT rules, and pay whichever is higher. The AMT was created in 1969 to prevent the wealthiest taxpayers, including corporations, from using loopholes or large deductions to avoid paying a minimum amount of taxes. Outrage persisted over that fact that 155 high-income households making over $200,000 at that time didn’t end up owing any federal income tax. That $200,000 would be worth $1.3 million today. However, the Congress and the IRS have never indexed the AMT to inflation, so, as wages and income have increased, the AMT has affected more middle class Americans than was probably intended.
So, it is a fact that the AMT tends to disproportionately affect middle class and upper middle class taxpayers. Those taxpayers affected usually have incomes over $100,000 and generally take very large deductions. One of the problems with the AMT is that the income that is exempt from the AMT calculation is still quite low. For 2015, it’s only $53,600 for single filers and $83,400 for married joint filers. 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 whereas, of course, the regular tax rules allow such deductions. Therefore, taxpayers who reside in states like New York and California are particularly vulnerable to the AMT. Also, if you have a large family, the AMT may be unfavorable to you since for each child you have, you may take a personal exemption under the regular tax rules while such exemptions are disallowed by the AMT rules.
Also, large deductions for payment of state and local taxes, medical expenses, and unreimbursed employee expenses will trigger the AMT. Other likely triggers include the exercise of incentive stock options (ISOs), long-term capital gains, too many tax credits, and interest on a second mortgage.
The AMT is 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. To generally compute the tentative minimum tax:
- compute taxable income by eliminating or reducing certain exclusions and deductions, noting the distinctions between when certain items are taken into account in computing regular taxable income and alternative minimum taxable income (AMTI);
- subtract the AMT exemption amount;
- multiply the amount computed in (2) by the appropriate AMT tax rates, and
- subtract the AMT foreign tax credit.
The tax law determines the AMT exemption amounts and tax rates. For individuals the AMT taxable income up to $175,000 is taxed at a 26% rate and AMT taxable income in excess of $175,000 is taxed at a 28% rate. 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. If eligible, you should complete and attach Form 8801, Credit for Prior Year Minimum Tax – Individuals, Estates, and Trusts, to claim the minimum tax credit.
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.
