Alternative Minimum Tax (AMT)

Tax laws provide benefits for certain kinds of income and allow special deductions and credits for certain kinds of expenses. The alternative minimum tax (AMT) attempts to ensure that anyone who benefits from these tax advantages pays at least a minimum amount of tax.

The AMT is a separate tax formula that eliminates many deductions and credits, thus increasing tax liability for an individual who would otherwise pay less. If your taxable income for regular tax purposes, plus any adjustments and preference items, is more than the AMT exemption amount, you must calculate tax using both the AMT and regular tax formulas and pay the higher of the two amounts.

Today, the AMT is likely to hit many middle to upper-middle income taxpayers. Unlike the regular tax brackets, the AMT exemption amounts are not adjusted for inflation annually by the IRS. As a result, deductions that were introduced to cut the tax bills of people of more modest means have caused some families who claim these deductions to be subject to AMT rules. The following increase your risk of triggering the AMT:

  • Numerous dependency exemptions
  • Large state income tax deductions
  • A large deduction for unreimbursed employee business expenses or miscellaneous expenses
  • Substantial medical expenses
  • Large capital gain
  • The exercising of Incentive Stock Options (ISOs)

Under the AMT, individuals are taxed at rates of 26% and 28% on the amount of taxable income above the exemption amounts. The American Taxpayer Relief Act provides a permanent “patch” for the AMT. In 2017, the exemption amounts are $54,300 for single filers, $84,500 for married couples filing jointly, and $42,250 for married couples filing separately.

Consult with us to determine if the AMT will affect you.