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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.

In 1969, Congress noticed that some people with a high gross income had a lot of deductions and therefore paid much less in tax than lower-income people who had few deductions. So Congress instituted the Alternative Minimum Tax to make the tax system fairer.

What is the Alternative Minimum Tax?
The Alternative Minimum Tax has evolved into a tax system that is parallel to our regular income tax system. The AMT expands the amount of your income that can be taxed, adding items that were tax-free under the regular tax system, and disallowing many deductions.

  • To figure out whether you owe any additional tax under the Alternative Minimum Tax system, you need to fill out Form 6251.
  • If the tax calculated on Form 6251 is higher than that calculated on your regular tax return, you have to pay the difference as Alternative Minimum Tax.
Tax software packages such as TurboTax automatically determine whether you owe the additional tax.

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.

Income Year 2000 Year 2005 Year 2010
$75,000-$100,000 2.3% 14.7% 29.3%
$100,000-$200,000 5.7% 16.1% 35.6%
$200,000-$500,000 18.8% 34.0% 64.0%

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.
  • Compare the Tentative Minimum Tax to your regular tax (Tentative Minimum Tax to see how close you were to paying the AMT.
  • Look for positive entries on lines 1 through 26, which indicate increases to your taxable income for the purposes of the AMT. For instance, you have to put various items back into your income, adding such items as your tax deductions, home equity mortgage interest, miscellaneous deductions such as employee business expenses, and incentive stock options.
What Happens to My Tax Credits?
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.

Business Credits
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.
  • If you have any of these credits, usually from a business entity or an investment, you should analyze lines 1-26 of Form 6251 to see what you can do to reduce your Tentative Minimum Tax and allow more credits.
  • Any general business credit not allowed may be carried back one year and carried forward twenty years.
Credit for Paying the AMT
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:
  1. Use tax-planning software during the year to minimize your overall tax liability.
  2. Study Form 6251 each time you prepare your tax return to see how close you are to paying the AMT. Evaluate how close your Tentative Minimum Tax (line 33) was to your regular tax (line 34). For information on Form 6251, see the Instructions.
  3. Check last year's return for any general business credits that are being carried forward. If there are some, they may be due to the Tentative Minimum Tax limit.