Understanding the Basics of the AMT

Tax laws provide benefits for certain types of income and allow special deductions and credits for certain types of expenses. The alternative minimum tax (AMT) was designed to ensure that anyone who benefits from certain tax advantages pays at least a minimum amount of tax. The AMT is a separate tax formula that eliminates many deductions and credits, thus increasing tax liability for an individual who would otherwise pay less. If your taxable income for regular tax purposes, plus any adjustments and preference items, exceeds the AMT exemption amount, you are required to calculate tax using both the AMT and regular tax formulas and pay the higher of the two amounts.

Today, the AMT is likely to hit many middle to upper-middle income taxpayers. Unlike the regular tax brackets, the AMT exemption amounts are not adjusted annually for inflation by the IRS. As a result, deductions that were introduced to cut the tax bills of people of more modest means have caused some families who claim these deductions to owe tax under AMT rules.

The following scenarios may increase your risk of triggering the AMT:

  • Numerous dependency exemptions
  • Large state income tax deductions
  • A large deduction for unreimbursed employee business expenses or miscellaneous expenses
  • Substantial medical expenses
  • Large capital gain
  • The exercising of Incentive Stock Options (ISOs)

Under the AMT, individuals are taxed at rates of 26% and 28% on the amount of taxable income above the exemption amounts. The AMT exemption amounts for 2017 (assuming no additional Congressional action) are $54,300 for single filers, $84,500 for joint filers, and $42,250 for married couples filing separately. Consult with us to determine if the AMT will affect you.

 

 

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