What is AMT and when does it affect an individual taxpayer?

If you think AMT may affect you, the following questions and answers may he helpful:

What is the purpose of the AMT? This provision was introduced to our tax laws years ago to help ensure that every taxpayer pays a minimum amount of tax on their income, even if being able to take advantage of tax deductions and preferences.

How is the AMT computed? If your taxable income, plus certain adjustments, is more than a specified threshold known as the AMT exemption amount, you may be subject to an additional layer of tax [the AMT] in addition to the regular federal income tax.

What is the threshold amount that will trigger the AMT? In addition to varying by filing status, the AMT exemption amounts have also been subject to annual adjustment for years prior to recent tax reform legislation which permanently increased the threshold levels. For 2013, the permanent AMT exemption threshold amounts are:

  • $51,900 for Single and Head of Household taxpayers
  • $80,800 for taxpayers using either the Married Filing Joint or Qualifying Widow(er) filing status
  • $40,400 for Married Filing Separate taxpayers

Where can a list of AMT factors be found that affect this calculation and under what circumstances should it be consulted?

  • The rules for AMT are more complex than the rules for regular income tax. The best way to be sure your income tax return has taken the AMT rules into account is to retain a competent tax return preparer to do your federal income tax return.
  • If your taxable income is in excess of the exemption amount listed above and your tax return reflects a lot of deductions or tax preference items you may wish to use the 2013 AMT Assistant tool on IRS.gov to find out if you may need to pay the tax or seek further assistance from a professional tax return preparer. There is a similar link for 2012 AMT and 2011 AMT purposes as well.
  • The following is a list of such tax preference items. If you received or claimed any of the following items in the tax year, you must complete Form 6251 and there is no need to use the AMT Assistant, but rather go straight to Form 6251 and consult instructions for the form [see below]:
    • Accelerated Depreciation
    • Stock by exercising an incentive stock option and you did not dispose of the stock in the same year
    • Tax exempt interest from private activity bonds
    • Intangible drilling, circulation, research, experimental or mining costs
    • Amortization of pollution-control facilities or depletion
    • Income (or loss) from tax-shelter farm activities or passive activities
    • Income from long-term contracts not figured using the percentage-of-completion method
    • Interest paid on a home mortgage NOT used to buy, build or substantially improve your home
    • Investment interest expense reported on Form 4952
    • Net operating loss deduction
    • Alternative minimum tax adjustments from an estate, trust, electing large partnership or cooperative
    • Section 1202 exclusion
    • Any general business credit in Part I on Form 3800
    • Empowerment zone and renewal community employment credit
    • Qualified electric vehicle credit
    • Alternative fuel vehicle refueling property credit
    • Credit for prior year minimum tax
  • AMT is calculated on Form 6251, Alternative Minimum Tax – Individuals and there is a separate page of Form 6251 instructions.
  • Form 6251 is used in conjunction with Form 1040; however, under certain circumstances taxpayers subject to AMT can file Form 1040A instead and use the AMT Worksheet in the Form 1040A instructions.

How can AMT be avoided? Minimizing the effects of AMT is all about tax planning during the tax year to alter the situations affecting the AMT calculation and in the preparation of the tax returns that yield the tax preference items listed above whenever the tax year is over and it is too late to change the taxable events to which you are subject.

  • If in a situation where AMT is always a factor, then use of some of the more aggressive options available in determining taxable income should be tempered in order not to waste the deductions or tax credits in a year where AMT will cancel any gain resulting therefrom and save them for a later year. For instance, if AMT will wipe out the advantages of using accelerated depreciation, do not use the more aggressive depreciation alternatives and save the tax basis in the assets for depreciation in later years.
  • In other situations, receipt of income may be accelerated or deferred into a year to which AMT would otherwise apply so as to reduce of eliminate AMT in the tax year to which the income is accelerated or deferred.
  • Likewise, tax deductions may be accelerated or deferred into a year to which AMT would not otherwise apply in order to reduce or eliminate AMT in the tax year to which the deduction otherwise would have applied.

Should you need further assistance in determining if AMT must be reported on your tax return, or other help in minimizing your legal tax burden or maximizing tax benefits available to you, you may make an appointment with one of our Directors of Audit and Tax Services by reference to the CONTACTS page above. Standard rates and terms for service will apply.

DISCLAIMER: This information is general in nature and the specifics of each taxpayer’s circumstances affect the calculation of AMT, and therefore we are not responsible for the application of this general information to the specific circumstances of a reader unless we have been engaged as the reader’s tax preparer. Furthermore, changes to tax regulations may occur at any time, and we are not responsible to update the information when such changes occur. Therefore, no guarantees are made concerning the technical accuracy of this information at the time of reading. However, several links have been provided so the reader can access current IRS information on the subjects discussed herein and should be utilized by any reader interested in the subject matter of this post when performing due diligence in this area.  See Terms of Use.

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Roy & Associates, PC serves clients in western Pennsylvania located predominantly in Westmoreland County, Allegheny County, and Fayette County.

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