The AMT

In a twisted plot to take back the tax breaks it provides, Congress created the alternative minimum tax (AMT).

Because some taxpayers - particularly wealthy taxpayers - had been so successful in their efforts to legally minimize their tax bills, Congress came up with another way to tax them: the alternative minimum tax (AMT). The AMT provides a formula for computing tax that ignores certain preferential tax treatments and deductions that taxpayers would otherwise be entitled to claim.

Initially, the AMT was intended to prevent higher-income taxpayers from substantially reducing or eliminating their tax liabilities through incentives offered by the tax code. In practice, however, the AMT affects even middle-income taxpayers because the AMT exemption amounts have traditionally not kept up with inflation. For example, the exemption rates set in 1992 were not increased until 2001.

As a result, many taxpayers are required to compute their income tax liability twice: once under the regular method and once again under the AMT method. An individual will be subject to the AMT if his or her AMT liability is more than the regular tax liability for the year.

What types of things can trigger the AMT? The most common items that can cause you to become subject to the AMT are listed below. These items must be added back to your taxable income in order to compute your AMT:

• all personal exemptions
• the standard deduction, if you claimed it
• itemized deductions for medical expenses, up to the lesser of Schedule A, line 4 or 2.5 percent of adjusted gross income
• itemized deductions for state and local income taxes, sales taxes, and real estate taxes
• itemized deductions for home equity loan interest (this does not include interest on a loan to buy, build, or improve your home)
• itemized deductions for miscellaneous deductions
• deductions you claimed for accelerated depreciation that exceed what you could have claimed under straight-line depreciation
• differences between gain or loss on the sale of property for AMT purposes and for regular tax purposes; these differences most commonly occur as a result of the different depreciation methods required under AMT, as described above
• addition of certain income from incentive stock options
• changes in income from installment sales, since the installment sale method generally can't be used for AMT purposes
• changes in certain passive activity loss deductions
• deductions relating to oil and gas investments, or drilling or mining operations
• interest on certain private activity bonds that would otherwise be tax-exempt
• other specified adjustments

If you have large amounts of any items on this list, and your adjusted gross income exceeds the exemption amounts discussed below, you (or your accountant) should compute your AMT liability on IRS Form 6251, Alternative Minimum Tax Individuals, to determine whether you must actually pay any AMT.

Planning Tools You can download Form 6251 to aid in your financial planning.

If AMT potentially applies to you, you need to know about the following:

• AMT rates and exemptions
• the tax credit for a prior year's minimum tax

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