AMT…WTF?!

Once upon a time, high income taxpayers were able to pay little or no income tax, because they were able to take deductions and credits for things that the average taxpayer couldn’t. IRS created the Alternative Minimum Tax (AMT) in 1969, in attempt to eliminate some of the benefits of all the deductions that high income taxpayers were getting, and generate at least some amount of tax.

The major problem with the AMT (and IRS recognizes it) is that it’s not indexed for inflation, so over the years, more and more middle-income taxpayers are finding that they’re owing more tax based on the AMT. I’ve seen this countless times over the years with my clients, and have had the same conversation with many people, often with the conversation starting out with the title of this article!

The AMT is computed on Form 6251. Generally, the computation starts with your adjusted gross income (AGI) less your total itemized deductions (line 41 of Form 1040). From this number, “alternative minimum taxable income” (AMTI) is computed, generally by adding back certain deductions that are allowable for the regular tax computation. For most taxpayers, the ones that come up most often are the itemized deductions for taxes and the miscellaneous itemized deductions. There’s a long list of other deductions and “tax preference” items that need to be added back to arrive at AMTI, but they’re beyond the scope of this article.

After arriving at AMTI, taxpayers are allowed an exemption amount, and the remaining amount will generally be subject to a tax rate of 26 or 28% to come up with the tentative minimum tax. Once this tax is computed, the amount is compared to the regular tax on the Form 1040, and if the minimum tax is higher, than bingo, you lose, and wind up with the AMT.

The 2011 AMT exemption amounts are $74,450 for married filing joint taxpayers, $48,450 for single and ‘head of household’ taxpayers, and $37,225 for married filing separately taxpayers. If your taxable income for regular tax purposes is higher than these exemption amounts, the AMT may apply to you, and you need to fill out Form 6251 to see if you are in the AMT.

I’ve attempted to make this as understandable as possible. If you think you might be in the AMT, it would probably be a good idea to have a tax professional prepare your taxes. Please pass this article along to your fellow taxpayers, and leave a comment if you’ve had a ‘run-in’ with the AMT.

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