What is the alternative minimum tax, and how do I know if I owe it?
The alternative minimum tax, or AMT, is an income tax levied by the U.S. government on certain individuals, corporations, estates and trusts and was intended to prevent wealthier taxpayers from escaping their fair share of tax liability through tax credits and deductions. However, the AMT is notoriously flawed and often accused of unfairly punishing middle-to-upper-class married couples, larger families and people living in high-tax states.
Approximately 4 percent of all taxpayers are expected to owe AMT in 2013, with the majority coming from those who earn between $200,000 and $1 million, have three or more kids, live in certain states including New Jersey, Connecticut, D.C. and New York and who are married but filing separately. So, if you fall into one or more of those categories and expect to have a lot of deductions on your tax return, you should be on alert.
Before the American Taxpayer Relief Act of 2012 (ATRA) was signed into law this January, the AMT could have affected nearly 23 percent of all taxpayers in 2013. Fortunately, the ATRA prevented those who earn between $100,000 and $500,000 from bearing the brunt of AMT responsibility. Ironically, the highest-earning taxpayers — including many corporations — are still less likely to pay AMT than those just below them because they are subject to regular tax rates higher than the top AMT rate.
The AMT rate is either 26 or 28 percent, depending on your gross income and filing status. Calculating how much of your income might be subject to AMT can be tricky and requires filling out the daunting Form 6251 from the IRS. Working with an accountant or using a tax preparation program can help relieve you of the burden of figuring out AMT on your own.
Still, many taxpayers will be surprised to learn that they owe AMT only after receiving a letter from the IRS, in which case they could also owe additional interest and penalties. To protect yourself from the risk of a surprise IRS bill next tax season, you can quickly check your potential AMT status using the IRS’ AMT Assistant.