Filing taxes with the alternative minimum tax in effect can present a host of penalties that you wouldn't encounter under the standard tax system. Under some scenarios, you may find yourself paying taxes under the AMT that you wouldn't pay otherwise.
What is alternative minimum tax?
Alternative minimum tax (AMT) is basically a separate system of taxes designed to target high-income individuals who don't pay enough taxes. The AMT system counts as income many items that aren't counted as income under the standard tax system, and doesn't enable you to claim many deductions you'd qualify for under standard taxes. It targets people who don't have traditional revenue streams for adequate taxation, but over the years it has begun to affect regular people who work hard and invest wisely.
The alternative minimum tax ignores some itemized deductions when filing taxes.
Some deductions that you'd be able to itemize under the traditional tax system are completely ignored under the alternative minimum tax. Under the AMT, you can't claim personal- or dependent-exemption deductions. You can't write off state and local taxes. You lose home-equity loan interest, except under some very specific circumstances. You also lose property tax write-offs.
The AMT penalizes you for investment activity.
In addition to losing some popular write-offs and deductions, the alternative minimum tax penalizes you for some investment activity. For example, if you invest in company stock options that allow you to purchase company stocks at less than market value, you may be liable to pay taxes on the spread between your purchase price and market value.
Under traditional tax rules, you wouldn't have to pay taxes on the spread. Under the AMT, the difference between what you pay and market value is treated as income, and you must pay taxes on it.
The alternative minimum tax unfairly penalizes people with valid deductions.
Families with several children typically qualify for a big chunk of deductions, at the rate of $3,500 each, or $3,650 in 2009. This means that a family with four children would qualify for nearly $15,000 in deductions under the standard tax code, whereas those deductions are not allowed under the alternative minimum tax. Combine that with deductions on home-equity loan interest, interest from second mortgages and state and local taxes, and deductions are drastically decreased; leaving you with a massive tax liability.
If you don't file the alternative minimum tax, you could face big penalties.
Unfortunately, filing taxes when you owe the AMT is a no-win situation. If you don't pay the alternative minimum tax today, you could be in big trouble in terms of owing back taxes and penalties when the IRS calculates your AMT liability. Even if you didn't realize you owe the AMT, you can still be held liable for paying it.
If you think you might owe the AMT, consult someone experienced in tax planning to help you minimize its impact. You can take several steps to minimize the AMT and reduce your tax liability, so don't pay more than you need to pay.
 | The Alternative Minimum Tax was established in 1969 to make sure wealthy individuals did not avoid paying taxes by misusing tax loopholes, exemptions, and adjustments. However, the exemption limits are not indexed to accommodate inflation, so more middle-class households are having to pay higher taxes. |
 | Need answers to your tax questions? Determining whether you're subject to the alternative minimum tax (AMT) can be useful. This way, you can find out sooner rather than later if you need to pay the higher amounts required under the AMT. |
The alternative minimum tax is a separate tax calculation that forms part of U.S. federal income tax law. It works in parallel with the general method for determining the tax. |
There are some things that can trigger the AMT to sneak up on you each year. Planning ahead for next year is crucial if you want to avoid this costly tax. What is the AMT anyway? It is a special tax created decades ago to prevent the super wealthy from having so many tax breaks that they don't pay taxes. |
The alternative minimum tax is important to tax payers, and is a controversial tax system because of its unexpected impact. How does the alternative minimum tax affect you? |
