The alternative minimum tax (AMT) runs parallel to the regular tax system. Although part of the federal tax system, it has a different rate structure. The AMT also eliminates some common tax breaks. It was implemented to keep wealthy taxpayers from finding loopholes to pay less taxes.
Unfortunately, at one time, the middle class was also affected by the AMT. Could that happen again? How does the AMT work?
Why Have the AMT?
In 1969, the AMT was enacted to keep wealthy taxpayers from taking too many deductions to lower or eliminate their taxes.So, instead of eliminating these tax preferences for everyone, Congress created a minimum tax.
How AMT Works
Any income above the AMT exemption amounts typically triggers the AMT. And under Internal Revenue Service (IRS) rules, calculating the AMT differs from calculating your regular tax.Certain deductions you normally take from regular taxes must now be added back into taxable income.
AMT Exemption Amounts
Taxpayers must exceed the AMT exemption to be subject to the tax. For tax year 2023, to be filed in 2024, the single-filer exemption is $81,300. Married or filing jointly filers have a $126,500 exemption and married filing separately exemption is $63,250.There are also exemption phase-out thresholds. These are single filers, $578,150, and married or filing jointly, $1,156,300. Those married but filing separately have a $578,150 exemption.
How to Calculate AMT
To calculate your taxes when you suspect you have an AMT, you start with your Internal Revenue Service Form 1040. Fill out the 1040 as you usually would. You'll then need to use Form 6251 add back certain income and drop specified deductions.Ensure you include income that might be tax-free under normal income tax but not under AMT; for example, Form 6251 requests information on certain types of income. Some include investment interest, tax refunds, and interest from private and activity bonds. It will also ask for numbers corresponding with capital gains or losses related to the disposition of property.
You’ll then need to remove certain deductions.
Once you’ve added the required income and added back specific deductions, subtract your AMT exemption amount. You’ll compute the AMT with the remaining figure.
Once you compare that amount owed with the figure you reached with the regular income tax system, you pay the higher of the two.
Lost Tax Breaks
The AMT can affect your eligibility for tax breaks.For example, you can’t apply the standard deduction. This deduction is $13,850 for single filers, $27,700 for joint filers, and $20,800 for heads of households. It’s gone with the AMT.
Personal exemptions also disappear. And you cannot deduct state and local taxes. Real estate taxes are not allowed as deductions as well. Many business items are curtailed, and long-term gains and certain dividends could increase your income under ATM.
AMT and the Middle Class
Although it was designed to affect the “wealthy” at one point some members of the middle class were also hit by the AMT.The AMT was not permanently indexed to inflation, which caught many taxpayers when inflation was high. The 2012 American Taxpayer Relief Act permanently indexed the AMT to inflation.
But some middle-class members were still dealing with the AMT. That’s because the exemptions were lower than currently.
Before the Tax Cuts and Jobs Act (TCJA) in 2017, a household income of over $200,000 per year had a 56 percent chance of an AMT.
For example, before 2017, a single-filer exemption was $54,300. That’s a $27,000 change. Those filing jointly had an $84,500 exemption instead of today’s $126,500. And married, but filing separately, had a $42,250 exemption.
The exemption phase-out thresholds were also much lower.
But the exemptions are not permanent. The TCJA will sunset in 2025 unless Congress addresses it. Many more favorable AMT rules and exemptions could disappear.
Triggers for AMT Liability Until 2025
You should be aware of some items that will trigger an AMT. One is having a high household income.Another is realizing a large capital gain, like selling a home or other investments. And although you pay the same rate regardless of which system applies to you, it could put you over the threshold and trigger an AMT.
Exercising stock options could trigger an AMT. Under normal circumstances, buying stock at a discounted rate isn’t taxable until you sell it. But the AMT recognizes a paper profit that’s taxable even if you haven’t received a monetary profit.
Is AMT Fair?
Those who promote the AMT claim it creates a fairer income tax system. It prevents higher-earning taxpayers from claiming considerable deductions and credits. Previously, these taxpayers could end up owing little or no taxes.But many believe it creates inequalities rather than a fairer system. Middle-class taxpayers and retirees were affected by AMT and could be again after 2025.
The Epoch Times copyright © 2023. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
