The Alternative Minimum Tax (AMT) was established to prevent wealthy taxpayers from using loopholes to help them avoid paying taxes. However, since the alternative minimum tax has not been updated to reflect inflation, it is starting to impact middle-class taxpayers.
Let’s take a closer look at the AMT and what it means going forward in future tax seasons.
The AMT is designed to recalculate income tax after adding tax preference items back into the adjusted gross income. This is a fancy way of saying that the AMT has a separate set of rules for calculating your eventual taxable income after deductions. Preferential deductions are added back into the income of the taxpayer and then calculated to the alternative minimum taxable income (AMTI). After the AMTI is calculated, the AMT exemption is subtracted in order to settle on a final taxable sum.
The AMT was created to prevent taxpayers from escaping their fair share of tax liability. However, a lack of adjustments over the years has caused some upper to middle-class families to deal with what is known in the industry as “bracket creep.”
Bracket creep forces taxpayers in lower earning brackets to pay for more taxes related to legislation that wasn’t originally designed to target them. Congress has since attempted to level inflation with AMT by passing an indexing law.
What is the difference between the alternative minimum tax and alternative minimum taxable income? After the two sums are calculated, the difference between the two figures is used to create a tax based on a rate schedule. The difference yields what is known as the tentative minimum tax (TMT).
Basically, if the TMT is higher than the taxpayer’s regular tax liability, he or she must pay the regular tax as well as the amount by which the TMT exceeds the regular tax. The taxpayer ultimately pays the full amount of the TMT. However, if the TMT is lower than the taxpayer’s regular tax liability, no additional tax is owed to the IRS.
In 2018, the AMT exemption for individual files was $70,300. For married joint filers, the exemption was $109,400. One should know these exemptions because if the individual earner or married couple earners were below the exemptions, they were not required to pay AMT. However, if the amount did exceed the threshold, taxpayers were forced to deal with additional calculations.
The good news is the IRS allows you to subtract the AMT exemption amount from your total tax liability. For example, if you earned $90,000 in 2018, you would need to pay AMT. However, you were allowed to subtract $90,000 from the individual filer exemption of $70,300 to reduce the amount to $19,700.
How do you determine if you owe AMT? Some tax software will do the math for you. A tax professional will know how to make the calculations.
If you plan to do so yourself, begin by filling out IRS Form 6251. It will walk you through expenses such as medical bills, home mortgage interest, and other miscellaneous deductions that help determine if the deductions are past overall limits established by the IRS.
Form 6251 will also request information on certain types of income, such as investment interest, capital gains or losses, and tax refunds. The formula for determining AMT can be complicated, so it’s a good idea to speak to a tax professional.
Do you need more personal assistance with understanding and calculating AMT? Contact Levy & Associates at (800-TAX-LEVY), or online at www.www.levytaxhelp.com. We have over 20 years of experience in the industry and offer free initial consultations.
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