The alternative minimum tax (AMT) is a means that Congress adopted for ensuring that those who they believe should be paying taxes are paying taxes. It works by looking at deductions differently than Form 1040, which changes the amount of taxable income. This taxable income is then balanced by the exemption—ultimately determining whether the taxpayer must pay regular tax or the AMT.
The Tax Code is a complicated highway to navigate. But what it lacks in clarity for the common man it makes up for with creative, legal methods of reducing the individual tax burden. However, Congress believes that no one who drives on taxpayer-funded streets should be able to completely avoid paying taxes unless his or her income is low enough to justify it.
AMT Limits Exemptions
The AMT limits the value of the deductions that taxpayers can take. For taxpayers who don’t itemize, they won’t be permitted to claim the personal exemption that they can on the 1040; however, there is an AMT-specific exemption that they can take—determined by their AMT income and filing status. For those who do itemize, there are certain deductions that they cannot take when calculating their AMT responsibilities, including taxes and miscellaneous itemized deductions subject to the 2% limit.
Whether itemizing or not, your taxable income will be reduced by the AMT exemption (unless your income exceeds a certain limit), which for 2015 was $53,600 for those filing single, $83,400 for married filing jointly or qualifying widow/widower, and $41,700 for married filing separately.
While it’s impossible to determine if you’ll have to pay AMT just by looking at your tax and financial activity over the past few years, there are a few indicators that can point out the possibility of exposure. These include:
- Receiving tax-exempt interest from private bonds.
- Having paid the tax in a prior tax year.
- Receiving an income or claiming a loss on tax-sheltered farm activities or passive activities.
- Taking a net operating loss deduction.
- Taking significant deductions for mortgage interest expense and charitable contributions.
- Receiving a qualified electric vehicle credit or an alternative fuel vehicle refueling property credit.
The Current Problem with the Old AMT
Since inflation has increased the cost of living and often resulted in salary increases, more people who would generally be considered middle class are now being expected to pay AMT—even though the exemption amounts are raised annually. That means it’s something with which more taxpayers should become familiar.
AMT is due in the tax year it is created and can be sent in with the taxpayer’s forms. The credit for paying it goes toward a future year’s regular income tax. CRI’s tax professionals can help determine whether you need to pay AMT. We can also help you plan your spending and investing in order to minimize your tax liabilities in future years. So basically, CRI can help you drive off into the sunset with the best possible tax advice.