Tax Tips
AMT, the Tax We Love to Hate
If you are vulnerable, tax-preparation software or a tax expert can steer you through the complicated calculations.
By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance
March 12, 2010
One of the most vexing parts of the tax-filing process is discovering that you owe the alternative minimum tax. Created back in 1969, in an era when tax rates went as high as 91%, the AMT was designed to make sure that the very wealthy couldn’t use loopholes to escape all their tax obligations. But because it was never indexed for inflation, it gradually morphed from a “class tax” into a “mass tax,” claiming additional middle-class victims each year.
Although almost everyone denounces it, the AMT is a big moneymaker for Uncle Sam, collecting more than $22 billion from four million taxpayers for 2008 alone. So far, Congress has not found a replacement for this lucrative revenue raiser. Since 2001, however, lawmakers have approved a temporary patch each year to protect more than 20 million additional taxpayers from being snared by it.
But if you paid the AMT last year and your financial situation remains about the same, you’re likely to feel the sting again when you file your 2009 tax return. For 2009, the exemption amounts were increased to $46,700 for single taxpayers and heads of household, $70,950 for married couples filing joint returns, and $35,475 for married couples filing separately.
Double trouble
The AMT is a parallel tax system. Every taxpayer is responsible for paying the higher of the regular tax or the minimum tax. Essentially, it means you have to do your taxes twice. First, you have to figure your regular federal tax and then calculate the AMT. If the minimum tax is higher, the difference between the two tax rates is added to your Form 1040 as an additional alternative minimum tax.
You must use IRS Form 6251 to calculate the difference between the two tax rates. If you use tax-preparation software, it will automatically calculate your AMT liability. A professional tax preparer should do the same. But if you’re still doing your taxes the old-fashioned way, get ready to tear your hair out if you have to tackle Form 6251 on your own. You can test drive the IRS’s AMT Assistant tool (www.irs.gov) to see whether you’re vulnerable, but even that is a lot of work.
Likely victims
Because the AMT disallows deductions for most state and local taxes and personal exemptions for you, your spouse and each of your dependents, you could end up paying taxes on more of your income. Taxpayers with large families or those who live in high-tax states, such as California and New York, are more likely to find themselves subject to the stealth tax. However, if you bought a new car or other vehicle after February 16, 2009, you can still claim the special sales-tax deduction, even if you pay the AMT. Exercising incentive stock options is another common AMT trigger, requiring you to prepay the tax on your paper profits. If the stock later plunges in value before you can sell it, that’s just too bad. The AMT has to be paid, although you can recoup offsetting tax credits in future years.
Although you can still deduct medical expenses, home-mortgage interest and investment interest under the AMT, different rules apply. For example, under the AMT, you can deduct only those out-of-pocket medical expenses that exceed 10% of your adjusted gross income compared with a 7.5% threshold under regular tax rules.
Reader Comments (10)
Posted by: JD at 03/12/2010 05:36:25 PM
$22 billion from four million taxpayers for 2008 alone, huh? That's $5,500 per person. That's not very much for "rich people". Know why? Because over the years, changes in the tax code (starting with Reagan in 1986) have minimized the difference between the AMT number and the "regular" number by removing loopholes in the regular tax code. Of course, social engineers keep adding new loopholes and complexity to the code, but now they've learned the art of the "income cap" to prevent the rich from cashing in. End result? A bunch of knuckle-dragging idiots who look only at the tax brackets and insist that the rich are underpaying, when in fact the AMT (which we all know has never changed, unfortunately) proves that they are paying more under non-AMT rules than they have since the AMT was created 41 years ago.
Posted by: Nick at 03/13/2010 10:05:29 AM
Nice article. I have a question about the exemption amount of $46,700 for singles. Does this mean if my AGI is $46,700 or below then I do not have to pay the AMT or is it the amount of my income that is excluded from AMT if I am subject to the AMT? It seems to be the latter, but please confirm or clarify. Thanks!
Posted by: libertarianman at 03/13/2010 06:38:06 PM
The one thing you never read about in AMT articles is that AMT seems to only really apply to the middle to upper middle class. It was a tax to prevent the rich from escaping paying their "fair share". What they don't tell you is that many executive compensation packages are designed to be very tax efficient. That's one reason why you see so many executives getting compensated with stock. You can even escape AMT with the ISO the author mentions, if you structure the package correctly. That leaves much of the compensation at the 15% capital gains level, not the higher 26/28 percent AMT or higher 39.5 percent income tax. All those executives who work for $1/year? I think not. I just don't know why these authors never talk about the real effect of AMT. It might raise a lot of tax dollars, but it's off of the middle class backs, not the rich. Wasn't that the intent of the AMT? What I'd like to see is an analysis showing who really pays AMT and who doesn't.
Posted by: ECB at 03/15/2010 04:45:08 PM
The column on the AMT was very informative. Perhaps you could write another one on whether the deduction for charitable contributions is affected by the AMT, as your column did not address that.
Posted by: JA at 03/15/2010 04:59:00 PM
I live in a high tax state, and although I am certainly not one of the Rich and Famous, I do get HAMMERED every year by the AMT. While I understand and conceptually agree with closing the loopholes and adding back to income certain tax preference items (i.e.- deductions of a preferential or beneficial nature), I fail to see why state income taxes should fall under the definition of a tax preference. The only thing worse than getting kicked in the groin once is to get kicked twice. Fixing this issue would be a huge help for those in the middle or upper middle class who are now in the AMT trap. Not that it would help those who live in the Bush states of Texas or Florida. Cheers to All.
Posted by: JB at 03/16/2010 02:39:20 PM
AMT is an outdated concept that the federal lawmakers are using to increase federal revenues at the expense of an ever increasing cross-section of the American workforce. Running up to the 2008 election, one of the candidates offered up a solution: 15% of your gross income, applied to ALL taxpayers, regardless of income, with no exceptions. This plan would basically eliminate the IRS, allow taxpayers to send in a tax return on a 3x5 card, and would be uniform to all. In addition, I don't remember the exact numbers, but the overall tax revenues would increase by a huge amount. What ever happened to equality to all?
Posted by: Phil at 03/16/2010 03:02:43 PM
Anyone ever note that the AMT is another version of the "flat tax" that has been bantered about? Heard that from none other than Jack Kemp. Flat Tax is already here - just needs to get cleaned up a bit.
Posted by: regina at 03/16/2010 05:04:59 PM
AMT will also hit taxpayers who have miscellaneous deductions. ex: employee business expenses, job hunting etc
Posted by: Federalist45 at 03/17/2010 10:36:00 AM
$250,000 gross - $30,000 federal income tax - $10,000 social security - $10,000 state income tax - $2,000 medicare - $8,000 real estate tax - $50,000 mortgage (a 4 BR, 2 BA, 2000 sq ft BASIC home in the D.C. area) - $30,000 HS tuition (necessary because of the pathetic state of the public schools into which I hemorrage tax dollars) - $10,000 various insurance, from life to auto to home but not medical) - $8,000 medical/dental - $8,000 college savings for two children = about $80,000 of useable income to cover all food, gas, cars, clothes, sports fees, music fees, charitable contributions, mandatory contributions to work-related events, utilities, communications. Yes, all of this still results in paying the AMT, having no IRA deduction, and having zero disposable income at the end of the day. This is an average home--barely making it paycheck to paycheck--and certainly in no way living extravagently. This represent the simple facts of life in this area--it is expensive just to live day-to-day, and what appears to be a large income of $250,000 (which, by the way, was created by scratching and clawing for every inch of it for over 30 years by two people) is actually a subsistence income in this extremely expensive area (sure, we could move a half mile over into a government-housing area and take our chances, but is that wise?). If you calculate all the sales tax, excise tax, fuel tax, utilities surcharges, and so forth, you will find that 50% or more of your income is taken from you by the government. It is absurd, particularly in light of the fact that the government gives back practically nothing and cries constantly for more. Then throw in capital gains and death taxes--and it reaches the absurd. Time to rethink it from ground zero--5% federal flat tax to cover defense and interstate commerce needs and that is about it. Restore the Constitution and, if We, the People, need government help, we will work on that at the local and State levels. In any case, the AMT is just one more government theft of hard-earned income. Put a stop to it. Write your Congressman and Senators today.
Posted by: davr at 03/18/2010 03:56:28 AM
Interesting article. I still haven't the slightest idea what the AMT is or does.