Alternative Minimum Tax (AMT)

March 10th, 2012

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This is a rather insidious provision of the income tax laws.  Perhaps the authors had Warren Buffet in mind when the tax law was passed.  The provisions were initially enacted in 1969 as the “Minimum Tax” law.  Just as the very same opinions among non-wealthy taxpayers exists today, in the 1960s there was a concern by Congress that many wealthy taxpayers were paying little or no tax at all since they had taken full advantage of the tax loopholes, or the benefits of the many tax deductions which were available to them.  Under the provisions of the law a taxpayer’s “Taxable Income” was first calculated with the full benefit of these “tax preference” deductions.  Then an alternate calculation was used whereby if your tax return included one or more of the “tax preference” line items, the deduction was added back to your taxable income to re-calculate or re-determine your “Taxable Income.”  Your income taxes were calculated based upon both methods and your income taxes were determined using the method which produced the highest income tax liability.   

The tax law was revised in 1982 and was appropriately re-named as  the “Alternative Minimum Tax” (AMT).   The original income threshold for being subject to the AMT was approximately $40,000.00.  At that time most taxpayers were not affected by the AMT.  However, since the 1980s our individual incomes have continued to increase, even if only adjusted for inflation.  However, Congress has not adequately adjusted the AMT income threshold.  For 2011 the AMT threshold for a married couple who are filing a joint tax return is $74,450.00.    

 If you believe that you may be affected by the provisions of this tax law, then review the instructions for Federal Form 6251 (http://www.irs.gov/pub/irs-pdf/i6251.pdf )  If there are additional AMT taxes on your tax return the amount will be on Line #45 (“Alternative Minimum Tax”) of Federal Form 1040.

Six Facts About the Alternative Minimum Tax

 

The Alternative Minimum Tax attempts to ensure that anyone who benefits from certain tax advantages pays at least a minimum amount of tax. The AMT provides an alternative set of rules for calculating your income tax.  In general, these rules should determine the minimum amount of tax that someone with your income should be required to pay.  If your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax.

Here are six facts the Internal Revenue Service wants you to know about the AMT and changes for 2011.

1.   Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses.   These benefits can drastically reduce some taxpayers’ tax obligations. Congress created the AMT in 1969, targeting higher-income taxpayers who could claim so many deductions they owed little or no income tax.

2.   Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.

3.   You may have to pay the AMT if your taxable income for regular tax purposes, plus any adjustments and preference items that apply to you, are more than the AMT exemption amount.

4.   The AMT exemption amounts are set by law for each filing status.

5.   For tax year 2011, Congress raised the AMT exemption amounts to the following levels

  • $74,450 for a married couple filing a joint return and qualifying widows and widowers;
  • $48,450 for singles and heads of household;
  • $37,225 for a married person filing separately.

6.   The minimum AMT exemption amount for a child whose unearned income is taxed at the parents’ tax rate has increased to $6,800 for 2011.

Use the AMT Assistant at www.irs.gov to determine whether you may be subject to the AMT. You can find more information about the Alternative Minimum Tax and how it affects you by accessing IRS Form 6251, Alternative Minimum Tax —Individuals, and its instructions at www.irs.gov. You can also order the form by calling 800-TAX-FORM (800-829-3676).
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Posted by Bill Seabrooke