Understanding the dreaded Alternative Minimum Tax
Enacted in 1969 as an add-on tax designed to ensure high-income taxpayers pay at least a minimum amount of federal income tax, the Alternative Minimum Tax (AMT) was designed to ensure high-income individuals were not able to evade income tax by combining enough legal tax breaks and deductions to reduce their tax liability to zero.
In 1970, approximately 19,000 taxpayers fell within the AMT’s higher income range, generating nearly $122 million of AMT. But, because the AMT did not have a provision for inflation until 2012, the income levels used to target 1970’s “high-income taxpayers” ultimately ended up affecting millions of average income taxpayers.
According to the Tax Policy Center, the Alternative Minimum Tax (AMT) will impact 4.1 million taxpayers and generate $28.2 billion—so it is safe to assume that Congress will not loosen the grip AMT has on taxpayers any time soon.
If you’re adjusted gross income is above the 2015 income level threshold for each filing status as outline below, you are liable for the AMT.
- Single or head of household – $53,600
- Married, filing jointly – $83,400
- Married, filling separately – $41,700
Under the regular tax system, deductions subtracted from AGI will reduce taxable income, thus lowering the amount of tax liability, but for AMT purposes certain deductions are added back, including the following:
- State and local income taxes,
- Real estate taxes,
- General sales and personal property taxes,
- Investment advisory fees,
- Personal exemptions,
- Employee business expenses that are itemized on Schedule A, and
- The standard deduction (for non-Schedule A filers).
While the regular tax system allows a deduction for mortgage interest on both acquisition indebtedness and home equity indebtedness, the AMT system allows a deduction only on acquisition indebtedness.
Medical and dental expenses are deductible under AMT to the extent that they exceed 10 percent of AGI for all taxpayers. This means the deduction remains unchanged for taxpayers under 65, but is reduced for taxpayers 65 or older.
Whether or not you are subject to AMT, you receive a benefit for making charitable contributions if you itemize since the deduction is allowed under the AMT system.
It is worth mentioning that the preferential rates that apply to qualified dividends and long-term capital gains for regular tax purposes also apply for AMT purposes.
While most taxpayers’ goal is to reduce total tax liability, a plan to reduce or eliminate AMT liability by decreasing deductions will, unfortunately, cause regular tax to increase.
Unfortunately, there is not much you can do to reduce your AMT exposure, however, having a good tax planning strategy in place ahead of time will help you understand what to expect when it is time to file your tax returns.
To start planning, contact a ShindelRock tax professional today.