The Alternative Minimum Tax (AMT) has been a thorn in the side of very wealthy higher income earners for decades but is increasingly affecting middle class families. Anyone with income in the $200,000 to $1,000,000 range is susceptible to the Alternative Minimum Tax, which is applied if it is higher than the tax liability calculated under standard tax calculations.
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5 Steps To Calculating Alternative Minimum Tax
The taxes payable to the IRS are the higher of the tax liability you calculate under regular tax rules and the Alternative Minimum Tax liability. Good tax software can perform the AMT calculation for you by comparing your Form 1040 standard tax liability with your Form 6251 AMT tax liability.
- To calculate your Alternative Minimum Tax Liability, start by assessing how much tax you are obligated to pay under standard tax rules.
- Your Alternative Minimum Taxable income is the sum of your standard tax liability and any deductions or tax breaks taken in calculating your regular tax liability.
- Based on your filing status, you are permitted certain exemptions, which should be subtracted from your AMT income.
- Your new tax liability is calculated by applying AMT tax rates to your AMT income.
- The taxes you owe are the higher of the AMT tax liability you calculated and the standard tax liability you calculated.
AMT Tax Brackets
Fewer Alternative Minimum Tax brackets exist compared to Federal Income tax brackets.
Federal Income tax rates can be as low as 10% and as high as 39.6%. Seven Federal Income tax brackets fall within that range based on the progressive tax system. Fewer AMT tax brackets exist, either 26% of 28%.
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How To Lower Your Alternative Minimum Tax Liability
Maximizing contributions to retirement accounts, deferring sale of investments that trigger long-term capital gains and reducing itemized deductions can lower Alternative Minimum Tax liability.
The Alternative Minimum Tax has been controversial for a long time and speculation surfaces from time to time that it will be abolished. Until then, a good tax preparer and good tax software are your allies in lowering your AMT tax liability.
Your tax preparer can help you identify ways to lower future tax liabilities but if you have been saddled with an Alternative Minimum Tax liability this year, it may be tough to find a way to lower the amount owed.
Some of the more common ways to lower AMT tax liabilities in the future include:
- Increasing charitable contributions
- Decreasing itemized deductions
- Maximizing 401(k) and IRA contributions
- Deferring sale of investments that trigger long-term capital gains, which are included in Alternative Minimum Tax income.
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What Are The AMT Exemption Amounts?
AMT exemption levels are adjusted annually for inflation.
Above threshold levels, exemptions phase out gradually and then completely. In 2016, for single filers, the exemption fully phases out for income levels of $335,300 and for married couples filing jointly, the AMT exemption phases out above $494,400.
| Single | Married, filing separately | Married, filing jointly | |
| Income level when exemption fully phases out | $335,300 | $247,450 | $494,400 |
Above certain income levels, the 26% rate kicks in while higher earners will see the 28% AMT rate kick in for the 2016 tax year as follows:
| Single | Married, filing separately | Married, filing jointly | |
| Amount of Income Exempt from AMT (26% rate kicks in above these levels) | $53,900 | 41,900 | $83,800 |
| Income Level at which Exemption Starts to Phase Out | $119,700 | 79,850 | $159,700 |
| 28% Tax Rate Kicks In Above These Income Levels | $186,300 | $93,150 | $186,300 |
What Deductions & Credits Are Lost Under AMT?
Most deductions and credits permissible when calculating taxes normally are not allowed under AMT rules.
Although charitable contributions may be deducted under AMT, most other deductions and credits which offer tax breaks under regular tax rules are prohibited. The following tax breaks are not allowed:
- Medical expenses
- Deductions for dependents
- State and local taxes deductions
- Travel expenses
Interest generally is not permitted as a deduction either but mortgage interest is unless it’s part of a home-equity loan in which case a tax preparer may be needed.
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Does AMT Affect You?
Money received from life insurance policy is tax-free when a person is deceased but life insurance policy proceeds received when someone is alive are taxable.
Over and above the various income levels described above which can trigger AMT, married couples, high-income earners, taxpayers with many dependents and those living in high income tax states are at higher risk of AMT.
If you are uncertain whether you are at risk of AMT, ask your tax preparer or use one of the best tax software packages to calculate your AMT tax liability.
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