The Alternative Minimum Tax is a separate income tax schedule some U.S. citizens have to pay instead of using the “old fashioned” IRS tax rules. It generally hits those with single incomes in excess of $52,800. It’s complex to figure, has its own rates and denies many of the deductions people traditionally use.
Figuring the AMT can be made easier through the services of a tax professional or tax prep software. An accountant can help reduce the AMT by making suggestions for changes to financial habits.
Why Does the Alternative Minimum Tax Exist?
Congress introduced the AMT in 1969 because they learned that some people with very high incomes were using so many deductions that they paid zero taxes. The AMT was an attempt to make sure everyone had some tax liability. However, because the lawmakers didn’t tie the tax to inflation it has affected more and more Americans with moderate incomes each year. According to the U.S. Tax Policy Center, without a fix the Alternative Minimum Tax would have hit 70 million people by 2020.
Even with the fix, 10% of all taxpayers will have to pay the AMT by 2020. The good news? The increase is because real incomes are growing, pushing people above Alternative Minimum Tax thresholds.
How Does the Alternative Minimum Tax Affect Taxes?
The AMT works by denying deductions and credits many taxpayers use regularly to decrease their tax bills. These include the standard deduction of $6,200 in 2015, personal exemptions of $3,950 per person and deductions for many medical expenses. By removing these deductions the AMT increases the adjusted gross income. This raises the tax to be paid.
Who Does the AMT Affect?
In 2015, the Alternative Minimum Tax will affect those with incomes greater than:
- Single Taxpayers: $52,800
- Married Filing Jointly: $82,100
- Married Filing Separately: $41,050
- Head of Household: $52,800
Those affected by the AMT can decrease their costs by enlisting the aid of a good tax accountant. According to the IRS, 75% of those who have to pay the AMT hire a professional. This is partially because the Alternative Minimum Tax is difficult to figure, requiring extra forms, worksheets and instructions. But the biggest reason for those hit by the AMT to hire an accountant is that a professional may suggest ways to avoid paying the AMT. At the very least, accountants can help taxpayers decrease the cost of paying the tax. Some suggestions might include making payments to retirement accounts like IRAs or 401Ks, taking tax losses sooner or selling off investments later.
How is the AMT Figured?
To figure out whether they owe the AMT, taxpayers must first do their taxes the traditional way. They can do this with form 1040 or 1040EZ, then complete the IRS AMT Worksheet. They may then be required to file IRS Form 6251.
To simplify the calculations, the IRS offers an online Alternative Minimum Tax Assistant. The assistant walks users through all the factors that decide whether someone has to pay the AMT. Alternately, tax preparation software like HRBlock.com, TurboTax.com and TaxACT.com can figure whether someone owes the AMT by asking a string of simple diagnostic questions.
In the video below, tax expert Jason Bellini explains the Alternative Minimum Tax.
- Alternative Minimum Tax: What is the AMT? – U.S. Tax Policy Center