Established in the 1960s, the Alternative Minimum Tax (AMT) is the federal government's way of prohibiting extremely rich citizens from not paying taxes. The impetus for the tax's creation was the Internal Revenue Service's (IRS) realization that volume of deductions and credits available to taxpayers with the largest incomes in the nation often resulted in their having no tax liability. To prevent these individuals from avoiding taxes altogether, the government established the AMT.
A Brief Overview of the AMT
The tax requires that individuals, corporations, trusts and estates with AMT calculations that exceed their traditional income tax liability calculations pay a percentage of the difference. It is not an additional or alternative to regular income taxes, but rather a different way of calculating liability. This tax ensures that those with numerous allowable deductions don't end up paying little to no income tax.
There is no minimum income amount which puts the AMT into effect; anyone whose tax liability is reduced due to tax deductions could be affected. Taxpayers or the representatives of a corporation, trust or estate are required to determine whether the AMT applies to them by completing both their regular tax form (such as a 1040) and Form 6251, titled Alternative Minimum Tax - Individuals.
- CNBC recommends that most taxpayers earning more than $75,000 a year complete Form 6251.
- See taxmap.irs.gov for a worksheet you can use to help determine if you need to complete Form 6251.
According to TaxFoundation.org, "The AMT exemption amount for the 2017 tax year is $54,300 for singles and $84,500 for married couples filing jointly." For 2018, the exemption amount will increase significantly to $70,300 for single taxpayers and $109,400 for those who file jointly, as reported by CNN. For this reason, as well as a few other changes, it is expected that significantly fewer taxpayers will owe the AMT for the 2018 tax year.
How Payments Apply
If the estimated amount of tax liability on the tax form is less than the estimated amount of AMT as determined on Form 6251, the taxpayer must pay a percentage of the difference between the two.
- Generally, the IRS charges 26 percent on the difference for the first $175,000 of difference for single taxpayers or the first $87,500 for married taxpayers filing separately.
- The IRS charges 28 percent on the remaining amount above those limits.
The AMT is unavoidable. In fact, failing to pay the AMT when you owe it may result in penalties, fines and interest being assessed against you. Completing the form is also recommended for business owners and individuals who exercised stock options within the last year.
The tax fulfills its intended job of ensuring that extremely wealthy people pay their share of taxes. In fact, many of them recognize their need to pay it and choose to plan their finances around it rather than try to avoid it.
Situations Leading to AMT Liability
If you are not a big-time investor or business owner, however, you may still need to pay the AMT. Because the AMT does not adjust for inflation, the majority of taxpayers affected by the tax are dual-income families with two or more children. Roy Lewis, author and contributor to the MotleyFool.com, identifies six typical situations causing AMT liability for non-business owner taxpayers:
- A high number of personal exemptions
- Significant amounts of state and local taxes
- Extensive capital gains
- Selling incentive stock options
- Large deduction for medical expense
- A significant number of itemized deductions
Lewis' advice is to thoroughly research the AMT and your finances and complete Form 6251 before the tax deadline.
The AMT Assistant
The IRS operates and offers an AMT Assistant to the general public through its website. This Assistant helps taxpayers determine whether they are subject to the AMT. It requires that the taxpayer enter information from their estimated tax return and, once complete, tells the user whether they are not subject to the AMT or if they must complete Form 6251.
The Assistant is anonymous and confidential. Because of this, it is a valuable tool for taxpayers wanting to know their tax liability without having to complete paper forms if it is unnecessary to do so.
Determining Your Tax Liability
Don't hesitate to determine if you are subject to the AMT; you could be subject to significant penalties if you try to skip it. Seek legal or financial advice if you are uncertain about how to estimate your tax liability.