What is the Alternative Minimum Tax and How Does It Work?

by Miranda Marquit

One of the most confusing things about our tax code is the Alternative Minimum Tax (AMT). As the name suggests, the AMT is alternative method of figuring your tax. In order to determine whether or not you are subject to paying the AMT, you are required to figure out your taxes twice: Once using the “regular” method that most of us are familiar with, and once using the AMT method that is designed to “catch” those with high incomes who might be underpaying on their taxes.

Alternative Minimum Tax (AMT)The Alternative Minimum Tax was originally meant to close loopholes high income earners were using to avoid paying the taxes they owed, by getting rid of some of the deductions taken by the wealthy. However, over the years, an increasing number of middle class taxpayers have been affected by the AMT. As a result, a “patch” is regularly applied so that those with middle incomes don’t find themselves hit by the AMT.

Alternative Minimum Tax – A Brief Look at How AMT Works

To find out if you are required to pay the AMT, you fill out Form 6251 from the IRS. You also follow the “normal” steps for figuring out your taxes. Then, you compare the outcomes. If it turns out that the Alternative Minimum Tax is less than what you owe following the regular rules, than you don’t have to pay anything extra. You just pay your taxes as normal. On the other hand, if it turns out that your AMT calculation is higher than your normal calculation, you are required to pay the regular tax, plus the difference between the two.

So, if you end up owing $35,000 in “regular” tax, but your AMT shows that your tax liability should be $40,000, you will need to pay another $5,000 on top of the $35,000, due to the AMT. Until you actually fill out the tax forms, you really don’t have an idea of whether or not you owe under Alternative Minimum Tax rules. In many cases, having an accountant or tax professional determine your taxes for you can be a big help, since it can be tedious and time consuming to do your taxes twice.

You should also realize that there are some things that actually increase the chances that you will owe the AMT. Taking a large amount of personal exemptions and piling on certain deductions, can increase your AMT liability as compared to your “normal” tax liability. There are a deductions that aren’t allowed under the AMT, such as property taxes up to a certain amount, and even the standard deduction and credits. If you are claiming these deductions and credits, and they are disallowed under the AMT, it is possible that the difference is great enough to trigger extra taxes for you.

As you consider your taxes for next year, it’s a good idea to consider the tax deductions and credits that you claim. While you want to reduce your tax liability as much as legally possible, it’s also important to consider that stretching for certain tax breaks may not be to your advantage, thanks to the Alternative Minimum Tax.

Published or updated September 13, 2016.
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