Alternative Minimum Tax?.....Surprise!
Posted By: Jennifer O'Neill // Dec 20, 2016
As you review your tax return this year, a year in which you worked harder and longer to reach that next level, you may find an entry on line 45. A tax entry new to your return from previous years known as the "Alternative Minimum Tax". You likely increased your income to a higher level triggering this new addition to the return. The AMT is generally a punitive method of computing income tax that does not allow some of the Tax preferences and deductions that the regular tax computation allows. When an AMT computation results in a higher tax, the higher tax applies, and the additional tax from AMT is added to your return.
The AMT originated almost 50 years ago to impose a minimum tax on higher income taxpayers who applied the legal deductions and other tax preferences afforded by the code resulting in a much lower tax due. These deductions and preferences were commonly seen in itemized deductions where high income taxpayers in States with high property taxes received increased reductions in taxable income. Since the introduction of the AMT there has been little adjustment to the calculation standards applied and years of inflation have resulted in an increasing number of taxpayers to be subject to AMT.
The AMT can be complicated to determine as many tax preferences can trigger AMT, especially in combination. The following are a few of the entries that commonly trigger AMT for the average taxpayer:
* Home Mortgage interest - Interest paid on a loan to acquire or improve a first or second home is deductible as long as its under the debt limit of $1 Million. If that debt is increased for refinanced debt ( up to $100,000), the regular tax computation is unaffected, but under the AMT calculation it becomes non-deductible. Loan Brokers generally are not aware of these limitations and the pitfalls of additional debt and potential interest deductions.
* Taxes Paid - When itemizing deductions, "taxes paid" are generally large deductions as property tax, State income tax and State sales tax can all be included. However for AMT purposes, none of these are deductible. This reduction is a frequent trigger of AMT depending on the State of residence.
* Medical Deductions - are generally allowed for AMT computation - but only if they exceed 10% of the taxpayers income. Even though its the same for regular tax purposes, taxpayers over 65 enjoy a limit of 7.5% on regular tax purposes, and this is usually the age which taxpayers incur such medical costs.
* Miscellaneous Itemized Deductions - This category includes the employee business and investment expense deductions....none of which are deductible for AMT calcuations. For some taxpayers this is a large area of deduction and the main trigger for AMT. Taxpayers who find themselves getting hit with AMT here should consider negotiating a reimbursement plan with their employers.
* Personal Exemptions - are not allowed in the computation for AMT. For 2016 this was an automatic $4,050 reduction in the AMT calculation. Divorced or separated parents with children really need to consider this if one of them is subject to AMT.
* Standard Deduction - For AMT purposes the standard deduction is not considered, so if itemizing deductions is possible, even when close, the AMT computation will allow some of the itemized claims versus no standard deduction amount. In this case the regular tax purpose has to be taken into account as well for the best result.
* Business incentives / Incentive Stock options......can provide many additional variables, and licensed experienced tax guidance should be sought.
The AMT ( Alternative Minimum Tax) is an added tax creeping into many taxpayer's returns with any warning. The precentage sof application of this tax have increased over 200% and will continue to do so unless adjsutments for inflation are made to the computations.If you find that tax entry on line 45 of your return, make sure you have a detailed discussion with your tax preparer on the reasons for the entry and possible actions you can take in the future to address it.
Prepared and presented by:
James T. Rindfleisch, EA
IRS Help Inc.