When discussions regarding the complexities of the US Tax Code take place, one specific is sure to be mentioned… the Alternative Minimum Tax (AMT). Most taxpayers do not understand the inner workings of this tax and many probably don’t even know it exists. Unfortunately, many first learn of the AMT when they surprisingly find themselves subject to it at filing time.

The AMT tax was created in 1970 as a means to insure taxpayers (including individuals, corporations, estates, and trusts) pay at least a “minimum” amount of tax regardless of exemptions, credits and deductions. The AMT is calculated using a different set of rules than those used for regular tax. Under these rules, some deductions taken for regular tax purposes are not allowed (or are limited). For example, no deduction is allowed for personal exemptions, nor is the standard deduction allowed. Also, miscellaneous itemized deductions (employee business expenses, tax prep fees, etc) are not allowed. Other deductions (such as medical expenses) are subject to different limitations than they are subject to for regular tax. Medical expenses may be deducted for AMT purposes if they exceed 10% of Adjusted Gross Income (AGI) as opposed to the 7.5% limitation for regular tax computations.

Furthermore, an exemption is subtracted from Alternative Minimum Taxable Income to determine the amount subject to the tax. The AMT is calculated alongside the calculation for regular income tax, and the taxpayer must pay the higher amount of the two taxes.

Criticism of the tax has sparked much debate over the years. While the tax was initially created in response to an announcement that 155 high income households had not paid a dime of income tax in 1969, it now affects millions of families each year. In 1997, 605,000 taxpayers paid the AMT. That number jumped to approximately 3.9 million in 2008. Additionally, 27% of households that paid the AMT in 2008 had and AGI of $200,000 or less ( Statistics of Income Bulletin, 2008 ).

Determining whether you are subject to the AMT can be very difficult. According to the IRS’s taxpayer advocate, this determination can be made by reading 9 pages of instructions, and completing a 16-line worksheet and a 55-line form. The IRS has created a tool for individual tax payers known as “ The AMT Assistant ,” designed to help determine if you are subject to the tax.

No single item alone may trigger the AMT. Each individual family must look at their own situation in making the appropriate determination. Also if you a corporation, or have a trust, a separate determination must be made for those entities as well. Feel free to call our office with any questions or concerns you may have.

Stephen Osborne
Accountant
sosborne@mo-cpa.com