Did you know that you're supposed to calculate your taxes two different ways each year? First, you figure your tax liability under the regular tax system. And then you re-calculate your taxes to find out whether you're subject to the Alternative Minimum Tax (AMT).
Blowing off the AMT calculation in the old days was no big deal since very few people were subject to that tax. These days, however, the chances of your getting hit with the AMT go up each year. Congress' Joint Committee on Taxation has projected that more than 35 million taxpayers will be subject to the AMT in 2010, up from just 1.5 million in 2001.
What is the AMT?
The Alternative Minimum Tax was instituted by Congress back in 1969 to ensure that high income taxpayers paid at least a minimum amount of federal income taxes - regardless of the tax deductions and credits they were eligible to claim.
So why are more taxpayers finding themselves subject to the AMT each year? The problem is due to inflation. While most other aspects of the federal income tax system have been indexed for inflation over the years, the AMT brackets have remained relatively constant. Plus, because of inflation, the taxable income reported by the average taxpayer has increased dramatically since 1969. Because of both of these factors, the AMT is no longer a tax just for the wealthy.
Should You Worry About the AMT?
More and more middle income taxpayers are finding themselves paying the AMT each year. Your chances of being hit by the AMT increase if you:
How Does the AMT Work?
To calculate your AMT, start with your federal taxable income, and then add back the personal exemptions that you claimed. Next, add back certain itemized deductions that aren't allowed under the AMT, including:
If you exercised any incentive stock options (ISOs), or are claiming depreciation in connection with business or rental property, you must adjust your taxable income accordingly. And you might also end up paying the AMT if you realized significant long-term capital gains during the year.
After making all of the required adjustments, you're ready to calculate your Alternative Minimum Tax. If your AMT liability exceeds your regular tax liability, you're required to pay the higher amount to the government.
A Form 6251 is the tax form you'll use to calculate your AMT. A good place to start is the IRS' website, www.irs.gov, where you can download the Form 6251 along with the instructions.
If you find the concept of the AMT confusing, or the instructions of the Form 6251 difficult to decipher, then seeking the assistance of a CPA who specializes in personal income taxes might make sense.
What Can You Do to Minimize the AMT?
Planning ahead is essential. Many great tax planning strategies have backfired because of the AMT.
Consider paying your state income taxes, real estate taxes, and unreimbursed professional expenses in years that you won't be subject to the AMT. Structuring capital gains transactions to span multiple tax years might help you avoid the AMT. And if you're fortunate enough to be holding ISOs that are in the money, beware of the AMT if you plan to "exercise and hold" any of your options.
Even if you end up paying the AMT, all's not lost since the IRS allows you to get back those taxes in future years in certain instances. To find out if you're eligible for an AMT Credit, you'll need to complete a Form 8801, Credit for Prior Year Minimum Tax. Good luck working through this form.
SAVE MONEY BY TAKING ADVANTAGE OF LOW INTEREST RATES
Are you taking advantage of these reduced rates? Lower rates will help you cut down on the time it takes you to get out of debt by minimizing the interest you pay each month. Remember, the lower the interest rate, the larger the portion of your monthly payment that will get applied against your outstanding balances.
WONDERING HOW TO GET BACK $3,000 FROM THE GOVERNMENT FOR EVERY YEAR THAT YOU WERE A MEDICAL RESIDENT?For more information, go to our February, 2001 Newsletter
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Tax and financial planning calendar for September, 2002
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