Most taxpayers are not even aware of what the Alternative Minimum Tax (“AMT”) is or if it impacts them. The tax was enacted in 1982 and replaces a minimum tax that was enacted in 1969. It has been around a long time, but in the past few years it has impacted more and more taxpayers.
So what is the AMT all about? Individuals with higher income often take certain deductions that significantly lower their tax. The AMT sets a limit on these deductions to arrive at a different tax liability. Essentially, the taxpayer pays the higher of the two.
As incomes for a lot of taxpayers have increased over the years, they suddenly have found out that they are impacted by the AMT because exemptions from the AMT had not grown by law since the enactment of the tax law.
Despite talk about the AMT being defanged, the tax continues to bite millions of filers. Congress did ease some of the pain in 2012, increasing the alternative minimum tax exemptions, and indexing them and the tax brackets to inflation.
But that was just a stop-gap solution aimed at keeping the number of payers of the minimum tax from exploding. So the AMT can still pack a wallop. If you owe it, it can mess up your year-end tax plans and boost effective tax rates on dividends and gains.
AMT is owed when it exceeds the regular tax. It’s 26% on the first $185,400 of alternative minimum taxable income and then 28%.
Deductions for many items are not allowed for the AMT: Personal exemptions. The standard deduction. If you itemize, you must add back state and local taxes, most of your miscellaneous itemized deductions and some medicals if you are 65 or older. Also for AMT purposes, incentive stock options are taxed when exercised and interest received from private activity municipal bonds is subject to the AMT.
AMT depreciation is slower, with write-offs stretched over longer periods. Many intangible drilling costs can wind up being added back to income. Some personal credits are allowed against the AMT, including the child credit, the adoption credit, the American Opportunity credit and the dependent care credit. And the foreign tax credit can be used to offset part of your AMT liability.
The AMT exemptions vary with filing status: Joint filers get $83,400. Singles, including heads of household, $53,600. Marrieds filing separately can take $41,700.
But these exemptions phase out for high-incomers. The phase-out begins above $158,900 for marrieds and $119,200 for singles. No exemption is available once AMT income is greater than $492,500 for couples and $333,600 for singles.
This can cause problems for taxpayers with capital gains or dividends, even though the 15% and 20% top rates apply for the AMT. The exemption’s phase-out raises the marginal rate on gains and dividends to 21.5% or 22%, plus an extra 3.8% if the Medicare surtax applies. So taking additional large gains can trigger the AMT. The anomaly disappears once the minimum tax exemptions are fully phased out.
If you owe the minimum tax, you may have to revise your tax plans.
Don’t pay your January 2016 state income tax estimate in 2015. The same goes for a real estate tax bill due in early 2016. Interest on home equity loans isn’t deductible for the AMT unless you use the proceeds to buy, build or renovate your main home. If you exercise ISOs in 2015, the discount is taxed unless you sell the shares this year.
Some payers of the AMT get a credit against regular tax in a later year. The credit is allowed to the extent the AMT bill is attributable to deferral preferences, including the spread on incentive options, intangible drilling costs and depreciation.
Adopted from The Kiplinger Tax Letter 5/22/15