I know what you’re thinking: “Great—an update on the Alternative Minimum Tax (AMT). Can’t wait to dig into that. Or, maybe I’ll clean my closets instead.”
But you read the headline, and you’ve gotten this far, so even though many people haven’t heard of the AMT, and those who have probably wish they hadn’t, you, my friend, are a seeker of knowledge, and owing to your pluck and fortitude, you shall be rewarded with some serious learning in the paragraphs that follow.
I say this with conviction because I know things – about lots of stuff – but the AMT in particular. And what I’m about to share with you can help you begin to wrap your arms around the byzantine conundrum that is that AMT, and then plan for it as we approach 2017.
Let’s first review some AMT basics.
What Is the AMT?
The AMT is a tax system that was enacted by Congress back in 1969 to keep a small percentage of very wealthy taxpayers from using tax loopholes to avoid paying any tax at all.
Congress could have attempted to close those loopholes. Instead, it devised a plan to calculate a person’s tax two different ways—once using the traditional tax system, and once with a special “alternative” system.
Consequently, a taxpayer will pay the higher of the two results. One tax system is complex enough. Not surprisingly, this double system is even more complex; it confounds many taxpayers, and sometimes, even experienced tax professionals.
Initially, the system didn’t affect a large percentage of U.S. taxpayers, so there wasn’t much of a fuss at the outset. In 1970, about 19,000 taxpayers fell within the AMT’s higher income range. However, AMT amounts didn’t sufficiently keep up with inflation, so more and more Americans found themselves subject to the AMT.
I Don’t Consider Myself Very Wealthy, or Even Mildly Wealthy; Does the AMT Apply to Me, and If So, What Can I Do About It?
Each year, a certain amount of your income, called your exemption, is exempt from the AMT.
Generally speaking, the AMT won’t affect you if your income is less than the exemption. For 2015, the AMT exemption amounts for each tax filing status were:
- Single and/or head of household: $53,600
- Married filing jointly: $83,400
- Married filing separately: $41,700
Actually, that’s part of the picture—there’s some math involved to determine whether or not you’re really subject to AMT. Ready? Here goes:
- First, you (or your accountant) essentially need to calculate tax twice. To understand what that means, I’ll reference the two taxing systems—the regular tax system and the alternative, or AMT, system. Putting pencil to paper, your regular tax is first calculated using the regular tax system. Under the AMT system, your AMT income tax bracket is computed by taking your adjusted gross income (as computed under the regular tax system) and adding it back, or adjusting certain deductions that are not allowed for AMT purposes.
- Next, the AMT exemption is subtracted from your AMT income tax base, and that net amount is subsequently multiplied by an AMT rate.
- Finally, the AMT that results from this calculation is compared to the regular tax. Any excess is added to your tax liability and appears as your AMT.
In summary, your total tax liability is expressed as regular tax plus AMT.
What About Deductible Items? Do They Apply to Both Regular Tax and AMT?
In some cases, yes. In other cases, no.
Take the standard deduction, for example. It reduces your standard tax amount, but not the AMT. Additionally, itemized deductions for state and local income tax, real estate taxes, general sales tax, personal property tax, investment advisory fees and employee business expenses are not deductible against the AMT. Personal exemptions also are not accepted when calculating AMT. (Note: personal exemptions are $4,000 per qualifying person in tax year 2015.) Consult your tax professional for a full accounting of deductible items and AMT-specific provisions.
Are There Updates for 2016 That I Need to Know About?
According to the IRS website, “The Alternative Minimum Tax exemption amount for tax year 2016 is $53,900 and begins to phase out at $119,700 ($83,800, for married couples filing jointly for whom the exemption begins to phase out at $159,700). The 2015 exemption amount was $53,600 ($83,400 for married couples filing jointly). For tax year 2016, the 28 percent tax rate applies to taxpayers with taxable incomes above $186,300 ($93,150 for married individuals filing separately).”
My Head is Spinning from All This; What Should I Do Next?
If you’re like most taxpayers, your goal isn’t to maximize your knowledge of the tax code, but rather, to minimize your tax liability. And remember, your tax liability is the sum of your regular tax plus AMT. If a deduction that trims regular tax liability is reinserted into the equation for AMT purposes, your AMT liability will increase. Even if reducing or eliminating AMT liability by decreasing deductions eventually occurs, as some experts suggest it might, your regular tax will increase.
We all like stories with happy endings. But in the case of the AMT, it’s not that simple. The best way to plan ahead for the AMT is to carefully read your tax return every year, including Form 6251, which is used to figure the amount, if any, of your AMT.
The specific strategy you (and your tax professional, if applicable) employ depends on your income, as well as the type of tax benefits that trigger your AMT. I believe that understanding the basics of how the AMT works can aid your tax planning immensely; it can certainly help you analyze the effect of a particular tax-planning strategy on your wallet.