When you calculate your federal income tax this year, remember than you may need to consider the Alternative Minimum Tax (AMT) when determining the amount of federal income tax that you owe. The AMT is, as the name states, an alternate or different method for calculating your federal income tax.
The goal of the Alternative Minimum Tax is to ensure that taxpayers pay a minimum amount of federal income tax. Normally, taxpayers can simply follow the steps outlined on IRS Form 1040 to determine how much they owe, which uses the taxpayer’s income less various deductions, exemptions, and tax credits. To calculate the AMT, a taxpayer uses their income, which includes income amounts that are not considered under IRS Form 1040, but does not consider the various deductions, exemptions, and tax credits used on IRS Form 1040. A taxpayer calculates their AMT using IRS Form 6251, along with the 2011 Instructions for Form 6251.
Although every taxpayer should confirm the Alternative Minimum Tax does not affect them, the AMT usually affects only taxpayers with a certain set of specific circumstances. These circumstances may include but may not be limited to the following when they exist for the taxpayer and are considered on IRS Form 1040:
- High income (usually above $150,000, but that is changing over time)
- High itemized deductions for state taxes, medical expenses, and certain other items
- High interest on a home mortgage
- Use of accelerated depreciation
- High investment expenses, operating losses, or passive losses
While these circumstances reduce the amount of tax owed on IRS Form 1040, they generally are not considered in the calculation of AMT. Therefore, the taxpayer who relies on these deductions to reduce their federal income tax under the regular tax calculation may end up owing more when using the AMT calculation.
The Alternative Minimum Tax is the subject of criticism at times for several reasons. First, whereas regular tax rates have been lowered and otherwise adjusted to account for inflation, cost of living, and other financial circumstances, the AMT rates and calculations have not been adjusted accordingly. The AMT was originally designed to ensure wealthy individuals—those historically earning $150,000 or more as noted above—paid at least a certain minimum amount of tax. However, the lack of adjustments to the AMT system over time now cause the AMT to affect many middle-class income earners that were not the target of the AMT originally, especially middle-class income earners with high deductions as noted above. And the lack of a cost of living adjustment means that those who receive higher pay simply because of the expensive costs of living in certain parts of the United States may be subject to the AMT, even though their income by no means makes them wealthy when considering their necessary expenses.
Second, the Alternative Minimum Tax complicates the process for filing federal income tax that is already considered overly complicated. Taxpayers may need to calculate their tax under both the regular federal income tax calculation as well as the AMT calculation.
If you need assistance in calculating and filing your federal income tax and are unsure if the Alternative Minimum Tax affects you based on your income and specific situation, please contact a tax attorney.
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- Federal income tax significant events, Part 6 – Retirement (taxlawhome.com)
- I believe the IRS has miscalculated my tax debt. What can I do? (taxlawhome.com)
Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.