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.
Need tax tips? Try the IRS Alternative Minimum Tax Assistant.
If you're not sure whether you're subject to the alternative minimum tax, the IRS has an AMT tax assistant that can help you figure it out. You simply answer some questions and enter some data from your form 1040, and the assistant walks you through the process of determining whether you owe the federal alternative minimum tax.
Unfortunately, this process requires you to have a draft 1040 prepared. Also, it doesn't alert you if you've made a mistake or missed valuable deductions that may influence whether or not you owe the AMT.
You may be subject to the alternative minimum tax if you have a high income.
The AMT exists to target high-income earners. If you earn more than $75,000 per year and have a lot of deductions, you may be subject to the federal alternative minimum tax. Likewise, if you own a business, have partnership interests in another business, own a rental property or exercise stock options during the year, you may be affected. Finally, if you make more than $100,000 annually, you are likely subject to the AMT. Consult tax law to determine whether you have to pay under the AMT.
If you exercise incentive stock options, you may end up paying the alternative minimum tax.
One big problem with the alternative minimum tax is that people who exercise incentive stock options may be stuck paying it. This means that even if you're not a high-income individual traditionally targeted by the AMT, you may still be subject to the AMT if you exercise incentive stock options.
In the event that your company offers the ability to purchase stock options under market value, under the AMT, you're responsible for paying taxes on the difference between your purchase price and market value. The AMT treats this spread as income, whereas traditional tax code does not. In some cases, incentive stock options alone are enough to push you into the alternative minimum tax bracket.
Computer software can help you determine if you must pay the AMT.
If you're preparing your taxes by hand, you must take extra steps to determine whether you have to pay the alternative minimum tax. Either you must enter data into the IRS AMT Assistant, or you must complete a Form 6251 to determine whether you're subject to the AMT. Both of these methods require a lot of extra work, and they aren't foolproof.
Computer tax preparation software can help you determine if you must pay the AMT. Taking data you've already entered to prepare your taxes, tax prep software can ask you a few simple questions and provide tax tips to calculate whether you must pay the alternative minimum tax. If you want to save time, or ensure you prepare the forms correctly for the sake of calculating whether or not you owe AMT, the small investment in the software may be worth it.
 | 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. |
 | 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. You may find yourself paying taxes under the AMT that you wouldn't pay otherwise. |
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? |
