What is The Alternative Minimum Tax?

Tax Defense

When first proposed, the Alternative Minimum Tax (AMT) was designed as a tax affecting mainly “the wealthy.” However today, more and more avergae people find themselves affected by the alternative minimum tax due to growing incomes. This article describes the AMT in more detail.

The AMT was first introduced in 1969. It was supposed to be a “rich man’s tax” - a fallback tax for those taxpayers with very big incomes, but numerous deductibles at the same time. Since then the AMT has been adjusted for inflation only twice and therefore affecting more middle class people today.

The AMT truly functions as an “alternative” tax in our current tax system. It has its own set of rules and tax rates for possible deductions. These are much more restrictive than the regular tax rules. The AMT rules operate in parallel with the regular income tax system in that if you’re already paying at least as much under the “regular” income tax as you would under AMT, you don’t have to pay AMT. But if your regular tax liabilities fall below this specific minimum, you have to fill the difference by paying the alternative minimum tax. AMT can be triggered by a number of different events. Although those with higher incomes are usually more susceptible to the AMT, many additional factors such as the amount of your personal exemptions or deductions can also trigger the alternative minimum tax. Even simple items such as a deduction for state income tax or interest on a second mortgage can fire off the AMT. AMT tax rates start at 26%, rising to 28% at higher income levels. This compares with your  regular federal tax rates, which (at the time of this writing) start at 10% and step up all the way to 35%. Although the AMT rates may appear to max out at a lower rate than regular taxes, the AMT rules allow significantly fewer tax deductions. The result is a potentially higher tax amount ($$$) you might have to pay. Unlike our regular taxes, you cannot just claim exemptions for yourself or other dependents of yours, nor may you claim the standard deduction. You cannot deduct state and local tax as well as property tax, and a number of other itemized deductions, including your home-equity loan interest (unless the loan funds are not used for home improvements on your primary home). Accordingly, the more exemptions and deductions you normally claim, the more likely it is that you’ll have an AMT liability.

AMT – Check List
Certain circumstances and tax items are likely to trigger the AMT:

If your gross income is above $100,000.
If you have large numbers of personal exemptions.
If you have significant itemized deductions for state and local taxes, home equity loan interest, deductible medical expenses, or other miscellaneous deductions.
If you exercised incentive stock options (ISOs) during the tax year.
If you had a large capital gain.
If you own a business, rental properties, partnership interests, or S corporation stock.

We recommend that if any of the items above apply to you, you should complete the AMT worksheet in detail when preparing your taxes. Rest assured that the IRS will do this as well and you do not want them to come back and ask for more money out of your pocket. Because if the IRS finds that you owe AMT, they’ll add penalties and interest. Worse yet, not paying your AMT liability may trigger an IRS audit. The AMT can be pretty complex and you should carefully look at each item to avoid problems with the IRS.

December 23, 2007 | Filed Under Tax Advice

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Tax Forms

Tax Defense

What is a tax form? - A tax form is a form to be used when paying your taxes or when preparing your tax return.

When do you need tax forms? If you are filing actual paper tax returns you will need the real tax forms. If you are filing electronically you will usually not need any kind of tax forms. The tax filiing software will simulate the tax forms for you.

Each US State has its own tax forms for local (local as in state) tax payers. The US Government has unified tax forms for your federal tax return.

A tax payer can download the tax forms from the websites of either the US State he or she lives in or directly from the IRS (Internal Revenue Service) website.

A tax payer needs to make sure to always use the latest tax forms available to avoid running into tax issues with his or her state or with the IRS (Internal Revenue Service). Failure to work with the latest tax forms can result in incomplete or worse - false tax returns.

December 21, 2007 | Filed Under Tax Advice

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