The Tax Reform Act of 1969 included one of the more clever devices to hit the Internal Revenue Code in the history of tax legislation, in my opinion. While public disapproval will commonly follow anything associated with raising taxes, the Alternative Minimum Tax (AMT) gave Congress a tool to raise taxes without raising tax rates.
Here’s a bit of background on how AMT got started. During the late 1960s Congress noticed that nearly 200 individuals across our great nation were legally using so many deductions, exemptions and credits that they were paying nothing in federal income tax; and as a measure to combat these rare scenarios, AMT and form 6251 were born. AMT is a parallel tax system operating in the shadow of “regular tax law.” AMT expands the amount of income that is taxed by adding items that are tax free under the regular tax system and disallowing many of the more favorable deductions and exemptions.
Behind the scenes your tax professional should be calculating your tax liability under “regular tax rules” and under “AMT tax rules.” You are ultimately liable for whichever tax is higher. While the list of differences between regular and AMT tax are extensive, the following bullet points highlight several of the more common differences:
- Personal and dependent exemptions are disallowed for AMT purposes.
- The standard deduction is disallowed for AMT purposes.
- All state and local taxes are disallowed for AMT purposes.
- Only medical and dental expenses in excess of 10% of Adjusted Gross Income are allowed for AMT purposes.
- Miscellaneous itemized deductions (those subject to the 2% floor) such as investment advisory fees and unreimbursed expenses are disallowed for AMT purposes.
- Tax-exempt interest on specified private activity bonds (except those issued in 2009 and 2010) are considered taxable income for AMT purposes.
- The excess of accelerated depreciation over straight line on tangible property is disallowed for AMT purposes.
- Equity mortgage interest not used for acquisition or improvement of a residence is disallowed for AMT purposes.
- The difference between the option price and fair market value of incentive stock options is considered taxable income for AMT purposes.The list of differences actually goes on and on. What makes this calculation especially sneaky is something referred to as the AMT exemption. The best way to think of the AMT exemption is that it is comparable to the standard deduction or personal/dependency exemptions. These amounts are pre-set by Congress and annually indexed for inflation. As you can see, AMT is not your average tax hike as the rules limit the value of certain advantageous tax breaks. Facts and circumstances are different for everyone so please contact your tax professional for more information.