Seven Facts to Help You Understand the Alternative Minimum Tax AMT

Individuals with a higher income may be subject to the Alternative Minimum Tax. Under the tax law, certain tax benefits can significantly reduce a taxpayer’s regular tax amount. The AMT sets a limit on those benefits. If the tax benefits would reduce total tax below the AMT limit, the taxpayer must pay the higher Alternative Minimum Tax amount. The AMT system comes with a completely different set of rates and deduction rules. People pay it only if their AMT tax amount is higher than their traditional taxes. Translation: If you’re paying the AMT, you are by definition paying higher taxes.

The fiscal cliff deal also raised tax rates for higher-income earners. Couples making more than $450,000 a year and singles earning $400,000 or more now face a “marginal rate” of 39.6 percent rather than 35 percent on income above those levels. Because the maximum AMT rate is 28 percent, these well-to-do taxpayers will typically be charged more on their regular returns so they won’t face the AMT.

 

  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. The Alternative Minimum Tax attempts to ensure that anyone who benefits from these tax advantages pays at least a minimum amount of tax.
  2. Congress created the AMT in 1969, targeting a small number of high-income taxpayers who could claim so many deductions they owed little or no income tax.
  3. Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.
  4. 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.
  5. The AMT exemption amounts are set by law for each filing status.
  6. For tax-year 2008, Congress raised the alternative minimum tax exemption to the following levels:
    • $69,950 for a married couple filing a joint return and qualifying widows and widowers
    • $46,200 for singles and heads of household
    • $34,975 for a married person filing separately
  7. Taxpayers may find more information about the Alternative Minimum Tax and how it impacts them by referring to IRS Form 6251, Alternative Minimum Tax Individuals, available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Even if you’ve been paying the reviled alternative minimum tax known as the AMT for years, your status can change. It all hinges on how much you make, where your money comes from and the deductions you can claim.

 

Seven Facts to Help You Understand the Alternative Minimum Tax AMT

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