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ALTERNATIVE MINIMUM TAX

        Alternative Minimum Tax         

Every year during tax preparation time, we accountants get the opportunity to hear that old musical refrain..."alternative minimum what?"  Ah, the alternative minimum tax (AMT).  Just when our well-heeled clients think they have the tax bogeyman subdued, they find out that the IRS has a vicious left-hook that can come out of nowhere.

 

Every year, we have a few clients become subject to the AMT and they are seldom happy about it.  The AMT was designed to ensure that high income taxpayers who are able to use certain types of deductions and other tax benefits end up paying at least a certain "minimum" amount of income tax.

Every year, we have a few clients become subject to the AMT and they are seldom happy about it.

 

We've all heard the anecdotes about the folks who have income rivaling Bill Gates, but paid absolutely no income tax during a given year.  Well, whether those stories were ever true to begin with, the AMT was Uncle Sam's solution to that seemingly unfair scenario. 

The tax is a lot more complicated than we want to get into for purposes of this discussion, but basically if you have certain deductions that are subject to the AMT, we must calculate two different tax amounts - your "regular" income tax and your AMT tax.  If the AMT is higher, then you are required to pay tax under the AMT calculation.  

One huge factor in the growing AMT trend has been the state taxes on stock gains earned since the 2009 recession.  Large state tax deductions are an "add back" item for purposes of the AMT computation.  The computation for AMT begins by taking your taxable income and adding back the deductions and benefits, such as state and local taxes and miscellaneous itemized deductions. 

Once your "alternative minimum taxable income" has been computed, an alternative minimum tax rate depending on your income level is applied to it.  There is an exemption amount that prevents most people from being subject to the AMT.  The exemption acts as a buffer, allowing a flat amount of deductions in calculating the AMT. 

If you have been subject to the AMT in the past and/or suspect that you may be subject in the future, please give us a call.  There are strategies you can take to lower the amount of AMT you incur.  The earlier you begin planning for an AMT hit, the easier it is to avoid it if possible.

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