Taxes 101: Alternative Minimum Tax

Taxes 101

Remember when you could fill out your taxes in 10 minutes? Yeah, I don’t remember those days either, but I have noticed that taxes seem to get more complicated each year. If you want to avoid paying more taxes than you have to, then you should be aware of an acronym that could cost you some money: AMT. It stands for Alternative Minimum Tax and while it doesn’t sound too bad, I’ll explain to you why you want to be tax savvy about it, and arm yourself with the best defense when it comes to this one: knowledge.

What is the Alternative Minimum Tax?

The original idea behind the AMT was to prevent individuals with high incomes from paying little or no income tax. Congress wanted to make paying taxes more fair and the Alternative Minimum Tax was created.

Unfortunately in execution AMT can affect many middle income households. This tax is calculated separately from regular taxes and greatly reduces the amount of deductions and credits you can take. If you are potentially eligible for the credit, you must calculate your regular taxes and your possible AMT and pay whichever is highest.

Should I Worry About Alternative Minimum Tax?

Even if you didn’t have to pay it last tax season, you may be eligible to pay the AMT this yearl; this can be a problem for households because the Alternative Minimum Tax is not tied to inflation. If your taxable income has you fall past the Alternative Minimum Tax exemption limit, you might have to pay additional taxes. Find out if you might have to pay the AMT.

It is difficult to pinpoint what may trigger it, but there can be factors can contribute towards Alternative Minimum Tax liability such as:

  • Medical expenses
  • Interest on second Mortgage
  • Exercising an incentive stock option
  • Miscellaneous itemized deductions

If you noticed, many of the items listed above are deductions and credits that are common on tax returns. That’s what can make the AMT so confusing. My best advice is to check your tax return from last year and see if you were close to being eligible for the AMT. If so, then check your paperwork this year too. Here are some additional ways to avoid the AMT.

Preparing for the Alternative Minimum Tax

The good news is that Congress raised the exemption levels in 2009, preventing millions from paying the AMT, but the adjustment is good for only one year. You can find more information on the Alternative Minimum Tax in Form 6251 from the IRS. If you find out that you have AMT to pay, then at least you have April 15, 2010 to save up the money required.