It’s estimated that nearly 4,000,000 American consumers will get stuck paying the Alternative Minimum Tax this year, more commonly known as the “dreaded AMT”. According to the Tax Policy Center, that means approximately $6,600 in extra tax costs on average.
Unfortunately, there are still many taxpayers who don’t even realize that there’s a two tax system in the United States and that, depending on several factors, they will have to pay whichever of those two tax amounts is higher.
The good news is that a certain portion of your income is exempt from the AMT. Married couples, for example, receive around $80,800 for the full exemption and, for single taxpayers, it’s approximately $51,900. Unfortunately the “AMT exemption” will, as your income gets higher, be phased out, meaning that single people and married couples earn between $200,000 and $500,000 are the ones that will more than likely be facing the tax this year.
What “triggers” put you at a higher risk of facing the AMT?
Many of the deductions that you might qualify for on your “regular” federal income tax return are allowed with the AMT, including personal exemptions, standard deductions and also deductions for state and local income taxes.
For example, when you live in a state where state and local taxes are high and you normally would take a big deduction on your regular taxes, or when you end up having many miscellaneous deductions or have several children (which usually means a number of personal exemptions), these deductions are instead adjusted downward or, in some cases, eliminated entirely when it comes to calculating the AMT.
Unfortunately, if you normally take these deductions, the AMT liability may be triggered by them. There are other “triggers” as well including exercising, but not selling, your stock options, reporting on your taxes that you have a large investment expense and also claiming accelerated depreciation on something. You could also put yourself at risk for the AMT liability if you use a home equity loan or line of credit for anything other than actually improving your home.
What can be done to avoid the AMT?
Frankly, you need to be careful when bunching your itemized deductions if you’re a borderline candidate for the AMT because they might end up losing their value. Shifting some deductions to a year when you won’t be subject to the AMT is what most tax expert advise, if possible.
Unfortunately, many upper middle-class taxpayers may not be able to do much if they are firmly in the “AMT zone” except prepare to pay higher taxes.