Tax Tips & Calculators

The Alternative Minimum Tax (AMT) began as a defense against wealthy taxpayers who deducted their way out of paying income tax. The tax's purpose is to ensure everyone pays a minimum amount of tax. Over the years, Congress hasn't updated the factors determining who must pay the AMT. As a result, more middle-income people must pay the AMT.

A number of factors created this effect,

Exemption Amount

Exemption amounts are set by law for each filing status. Congress hasn't adjusted the exemption amount for inflation since it enacted the AMT in 1969.

The AMT rate has increased substantially since its creation, but regular tax rates have decreased. So instead of the AMT rate being much lower than regular tax rates, as it used to be, the regular tax rates are often lower than the AMT rate.

The AMT is a parallel tax system, so you must:

• Complete your regular return.
• Complete AMT Form 6251.
• Compare the 2 taxes.
• Pay the higher of the 2 taxes.

Also for the AMT, you can't claim many of the deductions you can claim for your regular tax computation.

There's no easy way to see if you're subject to the AMT. Some indicators might be:

• Having more than 3 children
• Claiming many deductions on your Schedule A
• Exercising incentive stock options(ISO), but not selling the stock in the same year

Personal Exemptions

Form 6251, which is used to calculate the AMT, requires you to report adjustments to reflect the differences between the 2 parallel systems. So you might have to add back amounts you deducted for regular tax purposes, like personal exemptions.

You must first calculate your Alternative Minimum Taxable income (AMTI). If you itemize, start with your income after itemizing deductions but before taking your personal exemptions. If you didn't itemize, start with your adjusted gross income (AGI). So for AMT purposes, you can't claim your personal exemptions. These exemptions reduce your income on your 2011 regular return by $3,700 per person - less for high-income individuals.

Also, if you itemize, you can't claim as many deductions for the AMT as you can on your regular return. So you must add them back into your income. The only itemized deductions allowed for AMT are:

• Medical and dental expenses more than 10% of the regular tax AGI
• Charitable donations
• AMT investment interest to the extent of net AMT investment income
• Qualified housing interest
• Casualty losses
• Miscellaneous deductions not subject to the 2% of AGI limitation

In the regular tax system, you can deduct most of your mortgage interest, subject to limitations based on the loan's size. To learn more,see the Interest on Home Mortgage tax tip.

However, for AMT purposes, if you use mortgage money to do something other than buy, build, or substantially improve your first or second home, you can't deduct the interest. This affects you if both of these apply:

• You borrowed on a home equity loan or refinanced your mortgage for a loan that was more than the original debt.
• You used some of the money for other purposes, like to buy a new car or pay down credit card debt.

AMT – Depreciation

The AMT has different depreciation rules than the regular tax system. Depreciation is often lower under the AMT, especially for items put into service before 1999.

You must calculate a separate AMT depreciation for items put into service in a business or for investment purposes before 1999. By doing this, you usually spread the depreciation over more years and at a less favorable rate.

This will also affect the amount of capital gain or loss you realize when you sell the depreciated asset. The basis of the property is equal to its cost adjusted up or down by certain amounts – including a downward adjustment for depreciation allowed or allowable.

If your depreciation is lower for AMT purposes than for regular tax purposes, your basis will be higher for AMT. Since you have a higher basis, your gain will be lower or your loss will be greater. This difference in basis usually results in an adjustment in the year you sell the asset. The adjustment will decrease the amount of income subject to AMT.

You must track AMT depreciation separately, requiring additional computations to complete your return and the need for good recordkeeping.

You usually must still calculate depreciation for AMT purposes for these types of property:

• Personal property placed in service after 1998 that's being depreciated using the 200% declining balance method – usually 3-, 5-, 7-, and 10-year property under the modified accelerated cost recovery system (MACRS). To learn more,see Form 6251 instructions to learn more.
• Depreciation of real property placed in service after 1998 that isn't being depreciated for regular tax purposes using the straight-line method
• Most property placed in service after 1986 and before 1999

AMT–ISOs

The ISO is a preference item. It’s often a major reason you have to pay AMT. To learn more about preference items, see Form 6251 instructions.

When you exercise an ISO but don't sell the stock in the same year you exercised the options, you don't have income or loss to report on your regular return. It's as though the transaction never happened. However, for AMT purposes, you must assume something did happen.

Usually, an ISO allows you to buy stock at a price lower than the current fair market value of a publicly traded stock. An income item for AMT purposes is the difference between these 2 items:

• Amount paid for the stock – like your exercise price
• Stock's fair market value on the day you exercised your option

AMT– Taxable Tax-Exempts

Income from municipal bonds usually isn't taxable for regular tax purposes. However, if any of your municipal bonds are private activity bonds, you might have taxable income for AMT purposes. This is only true for private activity bonds issued after Aug. 7, 1986. The Form 1099-INT you receive should show how much of your tax-exempt interest, if any, is subject to AMT.

AMT Exemption

Your total AMTI and your filing status determine your exemption amount. Exemption amounts are:

• $7,450 if married filing jointly or qualified widow(er)
• $4,450 if single or head of household
• $37,225 if married filing separately

You must phase out these exemption amounts at the rate of 25 cents for each $1 of AMT income if it's more than:

• $150,000 if married filing jointly or qualifying widow(er)
• $112,500 if single or head of household
• $75,000 if married filing separately

You'll have income subject to the AMT after you subtract the exemption amount from the AMTI. The AMT rate is a flat 26% for income up to $87,500 - $175,000 if married filing jointly. Income more than those amounts is taxed at a rate of 28%. Income taxed at a lower rate – like long-term capital gains or qualified dividends – is still subject to those rates, not the AMT rate.