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What To Know About the Alternative Minimum Tax

 

The Alternative Minimum Tax is a mandatory alternative to the standard income tax. It's triggered when taxpayers make more than the exemption and use many common itemized deductions. According to one calculation, it hits 60% of taxpayers making between $200,000 and $500,000.

In 2017, the Tax Cuts and Jobs Act kept the AMT but raised the exemption and phase-out levels for tax years 2018 through 2025. It includes an automatic cost-of-living adjustment. (Congress eliminated the AMT for corporations.)

AMT payers essentially calculate their income tax twice — under regular tax rules and under the stricter AMT rules — and then pay the higher amount owed.

The AMT runs parallel to the standard tax system, but has a different tax rate structure and eliminates some common tax breaks. Here's a summary of how the AMT calculation works:

  1. Calculate your taxable income, but with fewer tax exclusions and tax deductions as dictated by the AMT rules — IRS Form 6251 has details on which tax breaks get the axe in the AMT calculations.
  2. Once you have that AMT version of your taxable income, subtract the AMT exemption amount.
  3. Multiply what's left by the appropriate AMT tax rates. There are two rates: 26% and 28%. Which rate you pay depends on how high your AMT taxable income is.
  4. Subtract the AMT foreign tax credit if you qualify for it. What's left is your income tax under the AMT rules.
  5. If your AMT income tax is higher than your basic income tax under regular rates, you pay the higher amount.

If you're not liable for the AMT this year, but you paid AMT in one or more previous years, you may be eligible to take a special minimum tax credit against your regular tax this year. If eligible, you should complete and attach Form 8801, Credit for Prior Year Minimum Tax — Individuals, Estates, and Trusts, to claim the credit.

Drilling Down for the Details

The law sets the AMT exemption amounts and the AMT tax rates. Taxpayers can use the special capital gain rates in effect for the regular tax if they're lower than the AMT tax rates that would otherwise apply. In addition, some tax credits that reduce regular tax liability don't reduce AMT tax liability.

Among the tax breaks you lose under the AMT are deductions for state and local taxes, such as property taxes, as well as various business items.

Investors also can face the AMT: Long-term capital gains and certain dividends could push your income above the ceiling.

However, taxpayers are not powerless. You may be able to stave off the AMT by lowering your adjusted gross income: Max out contributions to a 401(k), IRA or health savings account. Also, manage your long-term capital gains.

This is just a summary of a complicated series of provisions. Consult a tax expert to help you wade through the details.

 
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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