The alternative minimum tax (AMT) was established in 1969 with the intent of ensuring high-income earners paid their “fair share” of federal income taxes. This supplemental tax, that began with a target of 155 taxpayers, is estimated to impact approximately 3.4 million taxpayers in 2013. Today, a growing number of middle-income taxpayers are finding themselves subject to the AMT. Having a general knowledge of how this tax works will allow proper planning to mitigate its impact and potentially avoid the tax altogether.
The AMT is a parallel tax system, meaning taxpayers must compute both their regular tax liability and their alternative tax liability and pay the greater of the two. The calculation of the alternative tax tends to bring fear to most taxpayers as well as some tax professionals. The computation of the AMT is computed on IRS Form 6251 and includes three main components:
1. AMT Adjustments
In figuring the AMT, you begin with determining your regular taxable income and regular tax liability. Then, you add or subtract certain items that were allowed in computing your regular tax. Example, the AMT disallows the standard deduction and all personal exemptions. Other common adjustments, referred to as “tax preference items”, are state and local taxes, property taxes, sales tax, tax-exempt interest on certain private activity bonds, incentive stock options, and non-qualified mortgage interest. These adjustments are made to your regular taxable income to determine your alternative minimum taxable income (AMTI).
2. AMT Exemption
The next step in calculating AMT is determining your exemption amount. The purpose of the exemption is to establish a floor to separate lower income taxpayers from the AMT. The standard exemption in 2013 for those married filing jointly is $80,800 and $51,900 for single and head of household filers. The exemption begins to phase-out for married filing jointly taxpayers with AMTI over $153,900 and at $115,400 for single and head of household filers. The exemption is completely phased out when AMTI reaches $477,100 for married filing jointly taxpayers and $323,000 for single and head of household filers.
3. Tentative Minimum Tax
The final step in calculating the AMT is determining your tentative minimum tax (TMT). The taxpayer reduces AMTI by their exemption, resulting in a modified AMTI. Modified AMTI of $175,000 or less is subject to a 26% rate and the excess is taxed at 28%. The TMT is then compared with the regular tax liability. If the TMT is higher than the regular tax, the taxpayer is subject to AMT, which equals the difference between the two taxes. If the regular tax is higher than the TMT the taxpayer is not subject to AMT. Example, assume the taxpayer’s regular tax is $80,000 and TMT is $92,000. The taxpayer must pay the regular tax of $80,000 plus alternative minimum tax of $12,000.
The AMT has been widely criticized as antiquated and excessively burdensome. The original legislative intent in 1969 was to target 155 taxpayers with gross income in excess of $200,000 (seven figures in today’s dollars) paying no income tax as a result of certain “loopholes.” Currently, the significant percentage of taxpayers hit with AMT are those with incomes ranging between $200,000 and $500,000. As part of the American Taxpayer Relief Act of 2012, Congress set a permanent exemption which is indexed for inflation in an attempt to modernize the system. However, many view this as not enough and a strong argument can be made to repeal the AMT altogether. Notwithstanding, the tax appears to be here for some time so understanding its principles should prove advantageous.
The AMT is a parallel tax system, meaning taxpayers must compute both their regular tax liability and their alternative tax liability and pay the greater of the two. The calculation of the alternative tax tends to bring fear to most taxpayers as well as some tax professionals. The computation of the AMT is computed on IRS Form 6251 and includes three main components:
1. AMT Adjustments
In figuring the AMT, you begin with determining your regular taxable income and regular tax liability. Then, you add or subtract certain items that were allowed in computing your regular tax. Example, the AMT disallows the standard deduction and all personal exemptions. Other common adjustments, referred to as “tax preference items”, are state and local taxes, property taxes, sales tax, tax-exempt interest on certain private activity bonds, incentive stock options, and non-qualified mortgage interest. These adjustments are made to your regular taxable income to determine your alternative minimum taxable income (AMTI).
2. AMT Exemption
The next step in calculating AMT is determining your exemption amount. The purpose of the exemption is to establish a floor to separate lower income taxpayers from the AMT. The standard exemption in 2013 for those married filing jointly is $80,800 and $51,900 for single and head of household filers. The exemption begins to phase-out for married filing jointly taxpayers with AMTI over $153,900 and at $115,400 for single and head of household filers. The exemption is completely phased out when AMTI reaches $477,100 for married filing jointly taxpayers and $323,000 for single and head of household filers.
3. Tentative Minimum Tax
The final step in calculating the AMT is determining your tentative minimum tax (TMT). The taxpayer reduces AMTI by their exemption, resulting in a modified AMTI. Modified AMTI of $175,000 or less is subject to a 26% rate and the excess is taxed at 28%. The TMT is then compared with the regular tax liability. If the TMT is higher than the regular tax, the taxpayer is subject to AMT, which equals the difference between the two taxes. If the regular tax is higher than the TMT the taxpayer is not subject to AMT. Example, assume the taxpayer’s regular tax is $80,000 and TMT is $92,000. The taxpayer must pay the regular tax of $80,000 plus alternative minimum tax of $12,000.
The AMT has been widely criticized as antiquated and excessively burdensome. The original legislative intent in 1969 was to target 155 taxpayers with gross income in excess of $200,000 (seven figures in today’s dollars) paying no income tax as a result of certain “loopholes.” Currently, the significant percentage of taxpayers hit with AMT are those with incomes ranging between $200,000 and $500,000. As part of the American Taxpayer Relief Act of 2012, Congress set a permanent exemption which is indexed for inflation in an attempt to modernize the system. However, many view this as not enough and a strong argument can be made to repeal the AMT altogether. Notwithstanding, the tax appears to be here for some time so understanding its principles should prove advantageous.
http://digital.ipcprintservices.com/publication/?m=22404&l=1
http://attorneyatlawmagazine.com/las-vegas/2013/08/05/understanding-the-alternative-minimum-tax/
Ty Anderson is a principal with Swarts and Swarts, certified public accountants in Las Vegas, Nevada. Mr. Anderson began his career at an international accounting firm working in the federal tax department. His areas of concentration include tax planning, tax compliance, real estate transactions, gaming and hospitality, entity structuring, and acquisition and sale. Ty can be reached at 702.312.8111. Visit Swarts and Swarts on the web at www.swartscpas.com.
http://attorneyatlawmagazine.com/las-vegas/2013/08/05/understanding-the-alternative-minimum-tax/
Ty Anderson is a principal with Swarts and Swarts, certified public accountants in Las Vegas, Nevada. Mr. Anderson began his career at an international accounting firm working in the federal tax department. His areas of concentration include tax planning, tax compliance, real estate transactions, gaming and hospitality, entity structuring, and acquisition and sale. Ty can be reached at 702.312.8111. Visit Swarts and Swarts on the web at www.swartscpas.com.
