What is the Alternative Minimum Tax?
March 30 2020
Let’s chat about the Alternative Minimum Tax.
Sure, the rules governing taxes apply to all taxpayers. But we all know that in practice, taxes work a little bit differently for everyone. If you have a low income, you may qualify for more tax credits and deductions to help you out during tax season. And though a high-earner may not qualify for many of these same credits, they often have unparalleled access to additional tax benefits simply because of their wealth.
Between real estate depreciation, charitable donations, and other write-offs, wealthy taxpayers often employ numerous perfectly legal tax strategies to lower their tax burden substantially. And often times, this results in low—or no—taxes.
However, the IRS has a few ways of ensuring that all taxpayers, including the highest income individuals, continue to contribute on their taxes. One method of doing so is called the Alternative Minimum Tax, or AMT.
The AMT doesn’t apply to most taxpayers. Whether or not it applies to you, it’s still good to understand why it exists and how it works.
In this article, we’re going to discuss the history of the Alternative Minimum Tax. We’ll cover what it is and all the relevant numbers. Then we’ll explain how you can determine whether or not you’re subject to the AMT.
What is the Alternative Minimum Tax?
This is how the IRS describes the AMT:
“Under the tax law, certain tax benefits can significantly reduce a taxpayer’s regular tax amount. The alternative minimum tax (AMT) applies to taxpayers with high economic income by setting a limit on those benefits. It helps to ensure that those taxpayers pay at least a minimum amount of tax.”
Like we mentioned up top, every taxpayer potentially has access to tax benefits that can lower their tax bill. However, the IRS puts certain limits on the benefits that individuals with high incomes can access. This ensures they pay at least some amount of taxes.
The AMT operates parallel to regular taxes and expands the income that is taxable. It accomplishes this through a combination of added items and disallowed deductions. Think of the exemption like a standard deduction; it can help you calculate the AMT.
The History of the AMT
The Alternative Minimum Tax isn’t new. It’s actually around 50 years old!
It came about after Congress discovered there were a handful (fewer than 200) high income individuals who were paying zero federal income tax. However, it was completely legal, through a combination of tens or hundreds of deductions, credits, and other tax benefits that shrunk their tax bills down to nothing.
The AMT was a Congressional attempt to level the playing field and ensure everyone was paying at least some of their fair share. While initially, the AMT wasn’t indexed to inflation and started catching more folks at the upper end of the middle class, it’s now indexed to rise with inflation—just like the regular tax.
Speaking of, what are the totals associated with this tax?
What is the AMT exemption amount?
For 2019, the AMT exemption amounts are as follows, according to your filing status:
- Single: $71,700
- Married (Filing Separately): $111,700
- Married (Filing Jointly): $55,850
- Head of Household: $71,700
Will I need to pay the Alternative Minimum Tax?
The easiest way to tell if you may need to pay the AMT is, well, if you’ve already paid it. Unfortunately, that isn’t much help to taxpayers who may need to pay for the first time.
You may need to worry about the AMT if your adjusted gross income is higher than the exemption. Beyond that level, that income is taxable by the Alternative Minimum Tax. You can figure the totals with Form 6251.
Fortunately, if you hit the threshold for the AMT, you may not have to worry about dealing with all the calculations yourself. Most tax software will fold any AMT calculations into your regular tax filing process.
And so will tax preparers! Tax prep services (like us!) not only will handle the calculations for you, but we can also help you navigate the sometimes-thorny details that come with qualifying for the Alternative Minimum Tax. Trust us, it’s a lot better not to go it alone when you’ve entered a different tax environment like this one.
Dealing with the AMT
When you break it down, the Alternative Minimum Tax is a way of ensuring everyone pitches in—to some extent. But mileage may vary. Hopefully, now you at least have a better sense of how this tax works and why it exists. As far as ensuring you end up with an error-free tax return that maximizes your tax savings? Well, we’re only a few clicks away.
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