AMT
Feb 20 '01 (Updated Apr 26 '03)
The Bottom Line AMT is an alternative (Federal) income tax system. You calculate your regular tax, and the AMT, and pay whichever is larger.
(Any suggestions for a cute title will be gratefully accepted.)
As noted below, if your total income is less than $45,000, if filing a joint income tax return, or $33,750, if filing a single (including head of household) return, you don't need to worry about this.
Basically, (federal) AMT is a parallel income tax structure, which you (in many cases) must compute, to see whether it produces a larger income tax than the regular computation. It was intended as a way to prevent millionaires from avoiding all taxes, but, in recent years, it's been hitting more and more large families. Note also that the new (at this writing) proposed tax reduction plans do not include a reduction in AMT, so more people will be subject to it.
It's not actually calculated this way, but it could be calculated by filling out all your tax forms with different rules and tax rates. The principle differences are:
Some tax-exempt interest is AMT-taxable.
ISO and ESOP stock options are taxed earlier.
Business deductions are (usually) smaller -- depreciation is extended over a longer period of time.
There is no standard deduction.
The only itemized deductions allowed are:
1) Medical expenses over 10% of (regular) Adjusted Gross Income, rather than the 7.5% normally used in calculating itemized deductions.
2) Charitable contributions (with some additional restrictions)
3) Acquisition mortgage interest (see the review mentioned below, or my forthcoming review in "What is Mortgage Interest? ")
4) Casualty and theft losses
5) Gambling losses (to the extent of gambling winnings)
There is an additional personal exemption of (in tax years 1999 and 2000, at least): $45,000 if filing a joint return, and $33,750 if filing as single or head of household.
The nominal tax rate is 26-28%, although there is a phase-out of the additional exemption for high income returns.
Effective this tax season, personal exemptions and most of the child tax credits are allowable. (I believe the personal exemptions and child and dependent care tax credit were first allowable in 1999.) In years when personal exemptions were not allowable, many taxpayers with large families were hit with this tax without any business adjustments. Some, but not all, additional tax credits may be allowable.
If you may be eligible to pay this tax, the instructions for form 1040 instruct you to get and fill out form 6251. You only need to file form 6251 if (a) the AMT tax is larger than the regular tax (after respective credits are calculated), or (b) the AMT tax would be larger than the regular tax except for some reductions in AMT income. Any AMT tax due to acceleration of income (such as stock options, or accelerated depreciation), can possibly be recovered in later years on form 8801, Refund of Previous Years' AMT.
I said Federal AMT at the top of this review, because some states, such as California, have their own AMT. In the case of California, the additional exemption is higher, and the nominal tax rate is 7%.
If this looks familiar, it may be because it is an expansion of my mention of AMT in my review in Overlooked Deductions.
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