Okay, first, if you’re paying Alternative Minimum Tax, you’re probably not a dummy. Most people who have to pay the Alternative Minimum Tax (AMT) are highly paid employees. If you were really a dummy, you wouldn’t have a job that makes you pay AMT. That said, AMT taxes are really confusing and can make you feel like an idiot. I’ll try to make some sense of it here.
Why do we even have the AMT? Good question! Our tax laws have benefits for certain kinds of income and special deductions and credits for certain expenses. For example, you don’t pay tax on the interest from a munincipal bond and you get a tax deduction for paying mortgage interest on a house. If a person plays his cards right, he could drastically reduce his tax by taking advantage of these deductions. Congress created the AMT in 1969 so that high income taxpayers who claim lots of deductions still wind up paying income tax. That was the intention of the law—to make things fair.
Why is AMT such a pain in the behind now? For one thing, the AMT wasn’t indexed for inflation. What was considered to be wealthy in 1969 is fairly middle-class in 2011. People who were never originally targeted for the AMT are now subject to AMT taxes. Congress passed legislation last December for an “AMT patch” to adjust for inflation. The patch will be good for 2010 and 2011, but if they don’t make some type of permanent adjustment, we’ll be dealing with this over and over again starting in 2012.
Who has to pay AMT? Using the IRS definition: You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.
How’s that in plain English? For most people, if you don’t itemize your deductions, you probably won’t have to pay AMT. If you do itemize, one big deduction people lose has to do with employee business expenses—like when sales people take a deduction for their mileage, those people get hit with AMT. If you’re a salesperson who claims employee business expense deductions on your tax return, you’re much more likely to be hit with AMT than a person who doesn’t.
Other AMT hot spot issues are your state income taxes that you paid, and mortgage interest expense. With your mortgage, you can deduct the interest on the money that you used to purchase your home or improve your home. But if you refinanced your home to pay off a credit card, that part of your interest payment won’t be a deduction for you on the AMT form. Also, if you had enough medical expenses to claim a deduction on your regular return, it will be reduced or eliminated when calculating the AMT.
There are lots of items that affect the AMT, but those are ones that I see regularly when I’m doing tax returns with AMT. There are things like mining costs, intangible drilling costs, and research and experimental costs. I’m sticking with the issues that are fairly common.
If you’re using tax software, it will calculate the AMT for you automatically. You’ll notice that if your AMT is lower than your regular tax, you don’t get your taxes lowered. You only get to see the AMT tax if you owe more. (Doesn’t seem quite fair does it?)
If you’re still doing your return by hand, or just want to estimate of you will have to pay AMT for next year, you can use the AMT assistant on the IRS website. http://www.irs.gov/businesses/small/article/0,,id=150703,00.html
Hi Tamara,
Thanks for the compliment, but I think you should really read the AMT chapter of your accounting book. My little blog post here is a big simplification and your estates and trusts exam probably isn’t going to be simple. When I took my EA exam, 4 of the first 10 questions were about AMT (and of course, AMT was my weak subject!) Good luck!
Thanks a million for this! I’m studying for my exam on estate and trust, and it keeps talking about AMT. It referenced me to another chapter but who has time to read that! I just needed a simple understanding of what AMT is and you my friend gave me that!
Hi Juliana,
What you need to do is sit down with someone for some tax planning. The thing about AMT is that different people get hit for different reasons. Maxing your 401(k) is always a good idea (AMT or not) but maybe there’s something else that makes more sense for you.
On the bright side–at least Congress has set the AMT to tie to inflation now so you won’t be waiting around wondering what’s going to happen next year.
Here’s an important question–I’m guessing that you did this already, but it sounds like you did your own taxes at home using Turbo Tax or something. Did you “update” the software? Because if you didn’t, then you would have been really hit badly with the AMT.
At your income, it’s quite possible that you did have AMT–but I just wanted to check that because it’s also possible that you wouldn’t (it all depends upon what else is on your return.)
I am RN and I work 2 jobs. I have $100 extra taken out for federal and & $25 extra for state taxes and I still got hit for AMT tax for $160 000 income . What do I need to do to prevent. Do I need to max 401k . I’m over 55 and tired wking 2 jobs 7 days a week Just to pay the government at tax return when I give them extra every pay
Hi David,
No insult was intended. To be honest, I was not considering ex pat returns when I posted this. Thanks for the heads up.
What an insulting and ill-informed article. For your information, Mr. Roberg, many of us who have to pay the ATM every year are definitely NOT highly-paid, nor do are we even very far above the poverty line. I am speaking on behalf of the 9 million Americans who live abroad – and get paid in foreign currencies – to say nothing of the many million more foreign green card holders who are also subject to the AMT regardless of how little they earn.
Because the AMT does not allow any set-off for foreign taxes paid, and because we are all required to report our income in dollars, any of us who live in countries like the UK where the dollar is weak, are treated as if we are millionaires despite being very modestly paid.
We, in the millions, are victims too of the AMT.
Hi Pat,
What a great question! I had never thought of that. I went to go take a look at my “fake” tax return. I have Mr. and Mrs. Fake in my files and they also pay AMT. (They also do a lot of stuff depending upon what I need to research.)
Anyway, I had Mr. and Mrs. Fake owing about $2000 in AMT and then I redid the return with Mr. Fake as being single–what surpised me was the the AMT went away completely! But Mr. Fake also owed about $8000 more in taxes.
Now your Dad’s situation my be different, but I’m leaning towards him taking the extra income while he can still file as married, even if it does trigger the AMT.
What you can do is play with the numbers and see. The 2012 taxes are basically going to be the same as the 2011 taxes. If your dad did his own (or if you hired somebody) it’s pretty much a case of plugging in some more money under the retirement income to see how it plays out. 1. How much more tax will he pay? and 2. What would happen if he had to claim single?
Another thing to think about is the tax rates for 2013–right now that’s anybody’s guess. While normally I’m a “defer now, pay later” kind of girl–for 2012 I’m leaning towards “pay now, defer some other time.”
I’m thinking your dad’s on the right track.
My father had to pay AMT on his 2011 return and presumably will owe it also on his 2012 return. This year (2012) he is planning on taking a huge IRA withdrawal (in excess of RMD) since he can still file “married filing jointly” for 2012 but next year will have to file as single, and who knows what next year’s tax rates will be. He thinks his overall tax rate will be lower this year due to his married filing status since at least in the lower brackets there are higher income limits for marrieds than for singles. I thought however that AMT kind of wiped out the lower brackets and calculated all income at a flat rate of 26% or 28% (except qualified divs and long-term cap gains are still 15%). I know it’s a very complex area, but do you have any general advice as to whether it is worth trying to capture the married rates in the lower income brackets when one will be subject to AMT (even though getting a higher AMT exclusion as a married)?
Here’s the link to my new lottery post: http://robergtaxsolutions.com/2012/05/what-if-i-win-the-lottery/
Hi Shawn,
I loved your question so much I wound up doing a whole blog post about it. It should show up on Friday, May 25th so come back and check out the Latest News.
You shouldn’t have AMT on your lottery winnings. I’ve worked on a couple of lottery returns and AMT didn’t kick in and I ran a sample without the AMT. Usually, the two things that trigger AMT is excessive state income tax payments–which although you’d be paying a huge chunk of state tax money–it won’t be excessive for what the amount of income you have. The other big thing that triggers AMT is employee business expenses–and generally the lottery winnings will kick your income so high that you won’t qualify for that deduction anymore anyway.
Now you will have to pay more at tax time because you’re going to be kicked into the 35% tax bracket. So say you won a million dollars, you’d still owe another $55,000. I’d recommend paying it right away with an estimated tax payment–before you blow it all on something fun.
So, does a lottery jackpot winner have to pay amt (even if they don’t itemize). Let’s say the tax bracket is 25% federal, 6% state (31% taken out immediately), will the winner have to pay more at tax time based on the amt or based on federal tax being 35% or both.
And if AMT is applied would someone be better off doing a lump sum and paying the AMT once instead of paying yearly on the annuity?
Just curious.
@Marc,
If you’ve already had a second look before, then I’m confident you’re right. Yes, definitely pay.
Hi,
Actually, I was not kidding. I’m using Turbo Tax and been going through line by line making sure i have not missed anything. A couple of years ago, my wife had our taxes done by a professional (CPA) and same thing I paid AMT. In fact, he commented that I did a good job with my prior year tax returns.
I’m not a salesman and did not bother claiming any employee expense or medical expenses since i know i will not reach the threshold. I claimed my 2 adult children as dependents for they still in college full time and have no income. My charitable contribution is way too low for my ‘bracket’ , so, no red flags.
Thanks for clarifying it for me, much appreciated.
Marc
Marc,
you’re kidding right?
Just in case you’re not, no you cannot defer paying your AMT. Now you may want to have a professional take a look at your return since your income doesn’t sound like AMT income–but–and here’s the rub that kind of implies that you probably should be paying AMT. It’s one of those “I haven’t seen your tax return but I know what’s on it” kind of things–and that’s why you’re paying AMT.
Now–if I’m wrong–then there’s probably a mistake. Here’s my first guess
a. you’re a salesman and you claimed employee business expenses
b. you paid a whole lot of state income tax
c. you’ve got a whole bunch of kids.
If the answer is none of the above, get a second opinion. If I’m right–and I’m guessing it’s A–pay the AMT.
I just finished doing my taxes using a computer software. It says that :
AMT Due
AMT=65930
reg.Tax=-58548
Tentative AMT Due= 7382.00
If i don’t ‘pay’ the scheduled AMT payment (ignore the ‘voucher’)- and just elect to pay whatever income tax due at the end of the year, can i do that?
I’m not trying to avoid paying, just to clarify if whether I can defer the payment until when i file my next tax returns.
thanks
Hey Tom,
Sorry, but I don’t have a good answer for you. There is a possibility that you could recapture a part of the AMT next year when you file–since AMT is not normally on your return, but that’s about as good as I can get.
A couple of things–but I’m guessing you’ve already done this–since you inherited the land, remember that you’re starting with the stepped up basis–that is the value of the land at the date you inherited it–not the purchase price the person who died paid. Also–remember to write off the cost of selling the land. Like I said–I expect you’ve already done that, but I needed to say it just in case.
My siblings and I sold a piece of farmland this past year that we’d inherited about 10 years ago. The capital gain on that triggered Turbotax to apply an AMT on my return. This is a one-time sale so presumably my return will be back to normal next year, but is there anything I can do to avoid this tax on my current return? Thanks very much.
@S.Van–
Pretty much, you’ve got it. for what it’s worth though, Mitt Romney did pay $224,425 in AMT for 2011. Now that seems like peanuts compared to his income and overall taxes, but he did get hit with AMT. Here’s a link to his tax return for 2011: http://mittromney.com/learn/mitt/tax-return/2011/wmr-adr-return
So, if you earned $85,000 for the year, more than half from short term capital gains but you don’t itemize, will you get hit with a higher tax due to AMT? Also, why don’t you have to pay AMT if you have long term capital gains or dividends (taxed at 15%) even though some people earn millions of dollars this way (such as Mitt Romney)?