Posted By Wade Michels

The AMT and You

You need to know about the AMT, our infamous shadow tax system.
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The alternative minimum credit (AMT) was once called “the most serious problem within the United States tax code” yet many have never heard of it.  But you should know what the AMT is because if it applies to your tax situation, you will have to pay it. This is not one of those times where ignorance is bliss.

What

In 1970 the government rolled out the alternative minimum tax, to ensure that the wealthy paid enough to the IRS. At the time, lawmakers felt that the AMT was necessary because affluent Americans were hiring tax professionals to formulate strategies designed to minimize their tax liabilities. So in its purest original form, the AMT was originally supposed to target the rich, but today it is also hitting the middle class.

Middle class incomes are being hit with the AMT because the AMT tax brackets and exemptions have been adjusted for inflation only twice over the past 30 years, whereas regular tax brackets are adjusted for inflation annually. So as Americans make more money to pay for increasingly expensive goods and services, they’re getting closer to the awful realm of the AMT.

So how do most people find out?  Well, if you’re using a tax preparation software platform, like TurboTax or TaxCut, it will alert you if you need to pay the AMT. Accountants also know about it and will let you know if you’re liable. But sadly, the most common way people learn whether they must pay the AMT is through an IRS audit.

Who Should Worry

If you make six figures, chances are good that the AMT will apply to you. To know for sure, you need to work through your return with a tax professional, a tax software, or through form 6251. No matter which route you choose, taking the time to educate yourself about the AMT may save you some hard-earned cash down the road.

The problem is, the AMT doesn’t care about personal & dependent exemptions, property taxes, standard deductions and some itemized deductions. If you’ve used a home equity line of credit (HELOC) for anything other than home improvement, the AMT will add that back to your adjusted gross income (AGI) as well. It also will not recognize certain itemized deductions like business, investment and some medical expenses. As far as the AMT is concerned, all of the standard tools taxpayers use to reduce their AGI are thrown out the window.

Now What

When that’s all accounted for you get to deduct the AMT exemption which is $70,950 for joint filers or $46,700 for singles. Just know that the exemption is reduced by $0.25 for each dollar over $150,000 (married filing jointly) and $112,500 (for single or head of household).

So after the exemption has been applied, what’s left is subject to the AMT. For higher incomes, those in the $150,000 to $415,000 range, the standard rate of 26% and 28% gets multiplied by 1.25 to equal 32.5% and 35% respectively. Now regular tax rates run from 10% to 35% but the AMT ignores many deductions and exemptions, essentially raising your AGI, and that’s why it raises your tax bill.

So What

If your regular tax is $30,000 and your AMT is $39,000, you will have to pay your regular tax plus the additional $9,000 AMT. Basically, the AMT is just more tax, above and beyond your regular tax. While a recently enacted patch will prevent 18 million Americans from having to pay extra tax, there are still 4 million on the hook for the AMT. When it was first conceived only 19,000 were responsible for the AMT. Boy, have times have changed.

Opponents of the AMT argue that it should be repealed, labeling it a badly planned attempt to transfer wealth from the rich to the poor. While backers of the AMT believe it mostly hits its intended target. Without the AMT it’s believed that IRS tax collections will drop by $800 billion to $1.5 trillion over the next decade. No matter which side of the fence you’re on, there needs to be a solution.

Whether our future holds a decrease in tax revenues or an increased tax burden, the most important point for all of us is to be aware of the AMT and if necessary, be prepared for it.

To see if you qualify for this dubious honor click here

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