It is blowing my mind how many people this year have become unwittingly liable for the Alternative Minimum Tax. Good people who thought they had been withholding enough taxes now find themselves owing big. The people hit the hardest seem to have a few common characteristics. One in particular however stands out, taxpayers that converted traditional IRA’s to ROTH IRA’s not recognizing the extent to which such a transfer artificially inflates income for tax purposes. I thought, wrongly so it appears, that providing such education was the responsibility of the ‘Financial Advisor’ nevertheless taxpayer beware…..
In addition to recognizing artificially high income, if you receive or claim any of the following items you may be liable for 2010 Alternative Minimum Tax (AMT) and required to file IRS Form 6251
- Accelerated Depreciation
- Stock by exercising an incentive stock option and you did not dispose of the stock in the same year
- Tax exempt interest from private activity bonds
- Intangible drilling, circulation, research, experimental or mining costs
- Amortization of pollution-control facilities or depletion
- Income (or loss) from tax-shelter farm activities or passive activities
- Income from long-term contracts not figured using the percentage-of-completion method
- Interest paid on a home mortgage NOT used to buy, build or substantially improve your home
- Investment interest expense reported on Form 4952
- Net operating loss deduction
- Alternative minimum tax adjustments from an estate, trust, electing large partnership or cooperative
- Section 1202 exclusion
- Any general business credit in Part I on Form 3800
- Empowerment zone and renewal community employment credit
- Qualified electric vehicle credit
- Alternative fuel vehicle refueling property credit
- Credit for prior year minimum tax
The Alternative Minimum Tax attempts to ensure that anyone who benefits from certain tax advantages pays at least a minimum amount of tax. The AMT provides an alternative set of rules for calculating your income tax. In general, these rules should determine the minimum amount of tax that someone with your income should be required to pay. If your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax. Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. These benefits can drastically reduce some taxpayers’ tax obligations. Congress created the AMT in 1969, targeting higher-income taxpayers who could claim so many deductions they owed little or no income tax. Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.
You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount. The AMT exemption amounts are set by law for each filing status. For tax year 2010, Congress raised the AMT exemption amounts to the following levels:
- $72,450 for a married couple filing a joint return and qualifying widows and widowers;
- $47,450 for singles and heads of household;
- $36,225 for a married person filing separately.
The minimum AMT exemption amount for a child whose unearned income is taxed at the parents’ tax rate has increased to $6,700 for 2010.
John R. Dundon, EA – 720-234-1177 – email@example.com – http://prep.1040.com/jd/ – Enrolled with the United States Department of Treasury to Practice before the IRS – Enrolled Agent # 85353. Under contract with the IRS as a Certified Individual Taxpayer Identification Number (ITIN) Acceptance Agent – I am a Federally Authorized Tax Practitioner (USC 31 Section 330 + IRC 7525a.3.A) regulated under US Treasury Cir. 230.
The Alternative Minimum Tax, or AMT, is a parallel tax system to the standard tax system. Every taxpayer is responsible for paying the higher of the regular tax or the alternative minimum tax. The difference between the two tax calculations is determined using IRS Form 6251 (pdf) and using Instructions for Form 6251. If the minimum tax is higher than your normal income tax, the difference between the two tax rates is added to your Form 1040 as an additional alternative minimum tax.
The AMT has a completely different set of calculations than the regular tax. It does not allow the standard deduction, personal exemptions, or certain itemized deductions. Also some income which is not subject to the regular tax is added for AMT purposes. Your tax under AMT rules may be higher than your tax under regular tax rules. When calculating the alternative minimum tax, various adjustments are made. Some income is added which is not subject to the regular tax. Some deductions are adjusted downwards or eliminated entirely. The following items may trigger an AMT liability:
Itemized deductions for state and local taxes, medical expenses, and miscellaneous expenses
Mortgage interest on home equity debt
Exercising (but not selling) incentive stock options
Tax-exempt interest from private activity bonds
Passive income or losses
Net operating loss deduction
Foreign tax credits
This list is not comprehensive, but reflects the typical adjustments that can trigger an AMT liability. AMT Exemption Amounts for 2010 are:
$47,450 for single and head of household filers,
$72,450 for married people filing jointly and for qualifying widows or widowers, and
$36,225 for married people filing separately.
AMT Exemption Amounts for 2011 are:
$48,450 for single and head of household filers,
$74,450 for married people filing jointly and for qualifying widows or widowers, and
$37,225 for married people filing separately.
The exemption amounts mean that this amount of AMT taxable income is not subject to the AMT. Income over these amounts may be subject to AMT. Unlike the ordinary tax rates, the AMT has only two tax brackets. The AMT tax rate is assessed only on AMT income over the exemption amount. The AMT tax rates are:
26% on the first $175,000 of AMT taxable income, and
28% on the remainder of AMT taxable income
Quick Check to See if You are Subject to AMTThe Internal Revenue Service has an online calculator to help you figure out if you are subject to the alternative minimum tax. It’s called the AMT Assistant for Individuals.
Most software will compute the alternative minimum tax automatically. Individuals should review the actual tax form to understand which income or deductions are causing the AMT liability. For many taxpayers, deductions for state income tax, property tax and home equity interest and income from incentive stock options are the main causes.
AMT Tax Planning tips ….
Review your state tax withholding so that you pay in enough so you don’t owe but not enough that you substantially overpay. This will keep your state tax deduction to as low as possible, thereby keeping your AMT adjustments as small as possible.
Pay your property taxes when due instead of prepaying your next installment by the end of the year. Again, this will keep your deduction for state and local taxes as low as possible.
Sell exercised incentive stock options in the same year you exercise them. When you exercise & sell incentive stock options in the same year, you’ll be subject to the regular tax on the income but not the AMT. However, if you exercise but not sell, the value of the exercised options because income for AMT purposes.