As the name suggests, alternative minimum tax (AMT) is an alternative way of calculating federal income tax. It’s designed to ensure that high-income earners pay their fair share of taxes by limiting certain deductions and credits. If you earn a high income or have a lot of deductions or credits on your tax return, you may be subject to AMT.
Here are eight things you need to know about AMT:
1. The AMT was first introduced in 1969 as a way to prevent wealthy individuals from using loopholes and deductions to avoid paying taxes.
2. The AMT applies to both individuals and corporations, although the rules differ slightly for each.
3. To determine if you’re subject to the AMT, you’ll need to calculate your regular taxable income and then add back certain deductions such as state and local taxes, home equity loan interest, and miscellaneous itemized deductions.
4. If your AMT calculation is higher than your regular tax liability, you’ll have to pay the difference as additional tax.
5. The threshold for being subject to AMT changes every year based on inflation adjustments. For 2020, it’s $197,900 for single filers and $328,600 for married couples filing jointly.
6. Taxpayers who exercise incentive stock options (ISOs) may be at risk of triggering the AMT because ISOs are treated differently under the two tax systems.
7. Congress has passed several temporary patches over the years that increase the exemption amount or limit who is subject to AMT altogether; however these patches often expire after a few years leading many taxpayers into uncertainty going forward.
8. Finally it’s important not only look at whether taxpayer owes Alternative Minimum Tax but also how much they owe – sometimes due diligent planning can greatly reduce this amount.
In conclusion, while most taxpayers won’t be affected by alternative minimum tax laws unless they make more than six figures per year, it’s important to be aware of the rules and how they may impact your tax liability. If you’re unsure whether you’ll be subject to AMT or have any other questions about taxes, it’s always a good idea to consult with a trusted financial advisor or tax professional.