FAQ on the Alternative Minimum Tax
You may soon have to pay the Alternative Minimum Tax, which increases your tax bill by knocking out a lot of exemptions, deductions, and credits you may have gotten used to, when doing your regular income taxes. Here are the answers to common questions about the dreaded AMT.
Why Are Middle-Class Folks Hit with the AMT? In 1987, one year after the last major overhaul of the Alternative Minimum Tax system, only one tenth of one percent of all returns had to pay the Alternative Minimum Tax.
Today, the Alternative Minimum Tax is no longer just for high-income individuals. Now, many middle income Americans are paying the Alternative Minimum Tax or having their tax credits limited by its hidden effects.
The Treasury Department more and more people will be paying the AMT, over the next few years.
In fact, in 2010, the percentage of married couples with children paying AMT in all income brackets is projected to be 39%.
More people will be subject to the AMT in the future largely because the AMT exemption amounts have not been indexed for inflation. Regular tax brackets and regular tax personal exemptions are indexed for inflation each year to prevent "bracket creep," an automatic upward shift in the marginal income tax bracket through inflation. More and more people will be subject to the AMT, not because they are making more money in real dollars, but just through the effects of cost of living adjustments in their wage income.
Why Would I Have to Pay the AMT?
The simplest way to see why you are paying the AMT- or how close you came to paying it- is to look at your completed Form 6251 from last year.
If the calculation on Form 6251, Alternative Minimum Tax shows that your Tentative Minimum Tax is less than your regular tax, you do not owe any AMT, but you may still be affected by the AMT in other ways.
Due to the AMT, you may not be receiving all of your tax credits such as the Low-Income Housing or Work Opportunity Credits.
Your Tentative Minimum Tax limits these credits and other general business credits, because these credits cannot reduce the tax you pay below the Tentative Minimum Tax.
You get a tax credit for Alternative Minimum Tax paid in a prior year.
This credit, calculated on Form 8801, Credit for Prior Year Minimum Tax, calculates how much of the AMT was related to deferral items as opposed to exclusion items.
Certain items in Lines 1 through 26 of the Form 6251 are simply not deductible for AMT purposes, such as taxes, home equity mortgage interest, and miscellaneous deductions. Lines 1-9, 11, and 12 are exclusion items. If you paid AMT based on entries on these lines, you will not receive a tax credit for AMT.
Other items create timing differences, such as depreciation differences between the two tax systems, and will generate a credit on Form 8801 and reduce your taxes in future years.
Lines 13 through 26 are deferral items. An AMT credit may be generated based on the reversal of the timing difference of these items. For example, AMT depreciation methods may be slower than those for the regular tax, but you will eventually receive the same deduction.
How Can I Plan Ahead for the AMT?
There are some things you can do to plan ahead for the Alternative Minimum Tax:
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