Tax filing is mostly about numbers, but many people have questions about three important letters: A-M-T. You need to be aware of how the Alternative Minimum Tax could impact you this year and in the future. The Pennsylvania Institute of Certified Public Accountants provides some insights.
What Is the AMT?
The AMT first became effective in 1970. It was designed to prevent high-income taxpayers from using tax breaks to avoid paying any tax at all. It was created as a kind of parallel tax structure for those in upper income levels, with its own set of rules that disallowed some popular deductions and its own set of rates. Unfortunately, the income levels affected in the original law were not indexed for inflation. That meant that as inflation pushed salary levels higher over time, more and more middle-class people were hit by a tax meant for the rich. Even though Congress often made annual inflation adjustments, or patches, to exempt middle-income taxpayers, many still ended up paying the AMT. Only 19,000 people paid the AMT in 1970, but millions were paying it in recent years. Beginning in 2013, the American Taxpayer Relief Act permanently indexed the AMT thresholds for inflation, but the AMT’s reach is still pretty broad.
Will It Affect You?
To determine whether you are subject to the AMT, it’s necessary to calculate how much you would owe under the regular tax rules, and then see what you would pay following AMT rules by completing IRS Form 6251. You’ll have to pay whichever is higher. You’re more likely to be subject to the AMT if you live in a high-tax city and state or if you have a large family because the AMT doesn’t allow for some valuable deductions, such as those for state and local taxes and the personal exemption for children. Other AMT triggers include using a home equity loan for something that’s not a home improvement, exercising stock options during the year but not selling them, claiming high investment expenses, having numerous miscellaneous deductions, and claiming business depreciation on your return.
There are steps you can take to attempt to avoid AMT in the future. Your AMT status may change from year to year, so it could be a good idea to plan, if possible, to take certain itemized deductions in years when you won’t be subject to the AMT so you can benefit from those deductions. If it’s possible to spread out your earnings from year to year, that may help push you out of AMT eligibility. You might also be able to avoid it by lowering your income by maximizing contributions to tax-advantaged retirement accounts. Your CPA can work with you to target steps that minimize the chances you’ll be subject to the AMT and that make sense for your financial picture.
Your CPA Can Help
Whether it’s a tax matter or any other concern related to your financial situation, your CPA can provide expert advice that you can rely on. Turn to him or her with all your financial questions. Don’t have a CPA? Friends and family are a good resource for finding a trusted advisor. You can also visit www.picpa.org/moneyandlife
to access the free CPA locator tool.