What is the AMT?

Rather than showing themselves to be an ally to the middle class by ending the AMT or repealing it for years to come, my Republican colleagues refused to include it in today’s legislation and America’s middle class will surely suffer that choice greatly. 

-Ellen TauscherRead 

No, it is not a dyslexic version of ATM!

Back when people could shelter almost 100% of their high income, Congress decided to make that more difficult by creating the alternative minimum tax (“AMT”).  This and other changes have made it difficult for the top 1% of taxpayers, people with income over $1 million, to go much below an average tax of 20%.  But, an AMT rate as high as 28% is still great if your marginal rate is 39%.

However, the AMT is sometimes called the “stealth tax” because it now affects many less wealthy taxpayers!


Why do
you care?  Despite the title, you do not
get to pick

You must pay the higher amount determined by the regular and AMT
tax calculations.  If you have to pay the
AMT, you are paying almost a flat rate of 26% but it can be 28%, and you are
losing the value of certain deductions, including state income taxes paid,
certain mortgage interest and miscellaneous deductions, and having “preference”
amounts added to AMT income, including incentive stock options and alternate
depreciation schedules.  Data on 2012
income tax indicates that nearly every married taxpayer with income between
$100,000 and $500,000 owed some AMT.  

So what do you do?  Plan carefully

Make sure that efforts to reduce
regular taxes do not push you into paying the AMT.  Here is one example: If you have a year with
high ordinary income, you should pay your state income taxes during that
calendar year, since you are less likely to be in the AMT, rather than waiting
to pay in April of the next year, where a lower ordinary income means that you
will certainly be in the AMT. 

(Note: some states impose an AMT as well.)

Good planning pays off

As in the
example above, where preserving the deduction can be a very substantial savings
on your federal income taxes.

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