Tax Payers, You Need To Know About AMT!!!

Are you earning a handsome income? Do you belong to the upper-middle class society? If you answered ‘Yes’ to these questions, you must be aware of the Alternative Minimum Tax rule when you file your federal income tax.

AMT was introduced to enable high-income generating individuals to pay higher taxes as they often benefitted from tax deductions and exemptions allowed.

AMT recalculates the taxable liability of such individuals using a different method which increases the tax outgo. So, do you know what Alternative Minimum Tax (AMT) is?

What is Alternative Minimum Tax?

Alternative Minimum Tax, or AMT as it is popularly called, is a method of computation of taxable income which is different from the regular computation methods.

While the regular income tax computation method provides tax exemptions and deductions in various aspects, the AMT computation method does not allow many of these deductions and exemptions.

It recalculates the taxable income adding back disallowed deductions and exemptions. So, AMT is a parallel, supplemental tax computation system for individuals with higher incomes.

How is AMT calculated?

The AMT calculation is different from regular tax computation. To calculate AMT, the following steps should be taken:

Step 1 ascertain your Adjusted Gross Income (AGI) for the year if you have not itemized your deductions.

Step 2 deduct the itemized deductions allowed for AMT computation. Such deductions include:

  • Medical expenses and dental expenses which are more than 10% of the AGI
  • Donations to charity
  • Interest in AMT investments up to net AMT investment income
  • Qualified housing interest
  • Casualty losses
  • Other miscellaneous deductions which are not subject to the 2% of AGI limitation, etc.

Step 3 you get the Alternative Minimum Taxable Income (ATMI)

Step 4 subtract the allowed AMT exemption to arrive at the final taxable liability. The AMT exemption limit changes every year and is different for different filing statuses. For the year 2016, the AMT exemption limits are as follows:

Filing Status AMT Exemption Limit
Single and Head of Household $53,900
Married filing separately $41,900
Married filing jointly and Qualified $83,800
Widow/Widower Description

Step 5 the income post the deduction of AMT exemption is then taxed. This tax is progressive in nature. The first $186, 300 of the taxable income is taxed @ 26% and any income exceeding $186, 300 is then taxed @ 28%.

Step 6 the aggregate tax computed above is called the Tentative Minimum Tax (TMT). If the TMT is higher than the tax liability computed using the regular process, you have to pay the full TMT.

How AMT differs from regular tax computation?

The process of calculating AMT is very different from the process of calculating the normal tax liability. When calculating AMT, personal exemption (valuing $ 4050) cannot be claimed this is allowed under normal tax computation. Also, various deductions which were allowed in normal tax computations are to be added back to the income as they are not allowed in ATM computation. For instance, the tax-exempt interest from private activity bonds is taxable under AMT as is the difference between the fair market value and the strike price of Incentive Stock Options. State and local income taxes, investment expenses, mortgage interest on home equity debt, medical expenses, etc. are not deductible in AMT computations.

Even your passive income and losses, net operating loss deduction and foreign tax credit are recalculated as per AMT rules.

These adjustments highlight the difference between AMT and regular tax computation methods.

So, to conclude, if you are earning good, calculate your AMT when you file your taxes. Form 6251 helps in calculating your AMT liability and should be carefully filled in. If you are confused, take the help of a tax professional but ensure that you file your returns correctly so that you don’t end up owing the IRS and incurring a penalty for the same.