The Alternative Minimum Tax
The alternative minimum tax (AMT) is a separate tax that is imposed in addition to your regular tax. AMT uses a different set of calculations that are meant to ensure that high earners pay at least a minimum amount of income tax. The AMT calculations limit certain deductions that those high earners can utilize.
How does it work?
If your income is above the annual AMT exemption amount that typically triggers your obligation to pay the AMT. The most recent AMT exemption amount for single filers is $75,900 and begins to phase out at $539,900. For married filing jointly filers, the exemption amount is $118,100 and begins to phase out at $1,079,800
How do you calculate the AMT?
First, you calculate your taxable income utilizing IRS Form 6251 which will let you know which tax breaks you cannot use in your AMT calculations. You will then take that number and subtract whatever your exemption amount is. Once you have that number you multiply it by the AMT tax rate of either 26% or 28% (depends on how high your AMT taxable income is). If you qualify for an AMT foreign tax credit you can subtract that. Finally, if your income tax under the AMT is now higher than your income tax under the regular tax rate, you pay that higher amount.
Ways to avoid the AMT
There aren’t many ways to avoid paying the AMT if you wait until it’s time to pay it when filing your return. Instead, look early to see if you are possibly vulnerable to having to pay it in the future. One way to plan ahead is by looking at your adjusted gross income, if that is high enough to trigger paying the AMT, you can look to lower it. A few ways to do so are by maxing contributions to a 401(k), IRA, or a health savings account. Another tip is to monitor the size of your long-term capital gains.
One positive thing to mention is that most tax software will automatically run both calculations for normal tax and the AMT when you or your preparer are filling in your information.
For more information on the Alternative Minimum Tax and assistance with taxes in general, please reach out to the professionals at the Center for Financial, Legal, and Tax Planning, Inc., at (618) 997-3436.