What is the AMT?

AMT refers to the flat Alternative Minimum Tax devised by the government in 1969 as a tool to keep the wealthiest of taxpayers from avoiding their fair share of tax payments with large deductions and loopholes. The AMT runs parallel to the regular income tax and makes the taxpayer pay the higher of the two taxes. The problem is that the Alternative Minimum Tax was not adjusted for inflation and has begun to affect middle class income earners. Taxpayers falling under the AMT will pay an average $2000 more in taxes than they would without the AMT.  

The taxpayers most at risk for paying the AMT tax rate are usually married with two or more children and own homes located in states with high income taxes such as California, Michigan and New York. The reason these particular taxpayers are affected is because the government will not allow all of the tax deductions to lower their taxable income. The deductions are viewed as excessive. The following items normally trigger the AMT:

• Itemized deductions for state and local taxes, medical expenses, and miscellaneous expenses
• Mortgage interest on home equity debt
• Accelerated depreciation
• Exercising incentive stock options
• Tax-exempt interest from private activity bonds
• Passive income or losses
• Net operating loss deduction
• Foreign tax credits
• Investment expenses

Note that the first two items are common to many taxpayers owning a home. The remaining items refer to investments and self employment income. There is no real income level in which a taxpayer falls under the AMT. Rather, the qualification for AMT is dictated by the percentage of income that deductions amount to. As it currently stands, the AMT tax rate is 26% on the first $175,000 of AMT taxable income and 28% on the remainder of AMT taxable income

There is an exemption to the AMT if taxpayers qualify for the higher tax. Under the tax relief act of 2010 the exemption amounts were increased substantially. If the fiscal cliff is allowed to occur without congressional intervention, the exemption is scheduled to go back to $33,750 for single and head of household taxpayers, $45,000 for married filing jointly and/or qualifying widows or widowers and $22,500 for married people filing separately. What this means is that if a taxpayer qualifies for the AMT, the exemption amounts referred to above are not taxed at the AMT rate. Lower exemption amounts will result in a greater number of taxpayers having to pay the AMT rate.

Article by: Joan Villazon, CFO
Consumer Debt Solutions, Inc.
http://www.consumerdebtsolutions.net