Review of the Alternative Minimum Tax

by Alan Huerth 15. May 2012 13:15
  Most people are familiar with the Federal Income Tax (regular) system, but most are not that familiar with the Alternative Minimum Tax (AMT) system.  AMT does not apply to partnerships or S-corporations, but does apply to C-corporations, Estates, Individuals and Trusts.  AMT is a tax system separate from the regular tax system.  Under AMT, separate rates (26% or 28%) are applied to AMT income (regular income after certain “add backs” of various regular tax benefits) to determine the AMT tax liability.  The Taxpayer pays the larger of regular tax or AMT tax liability. The intent of AMT is to force taxpayers with high income and lots of certain types of deductions to pay tax to the Federal government.  An exemption amount is provided to prevent taxpayers with lower income from being included in the AMT system.   This exemption is phased-out (eliminated) for higher income earners.  Unfortunately, this exemption amount and phase-out are not indexed for inflation.  As a result, more middle class taxpayers become included in the AMT system each year.  This forces Congress to pass AMT legislation each year to “patch” this problem.  Congress has not always addressed this issue effectively. For individuals, the major “add backs” are: The personal exemption.  Taxpayers with many exemptions may end up paying AMT tax for this reason alone. The Standard Deduction. Real Estate taxes and State taxes deducted as itemized deductions. Miscellaneous Itemized deductions. Medical Expense deductions. Incentive Stock Options (ISOs).  The unrecognized gain on the exercise of the options is recognized for AMT. C-corporations whose average annual gross receipts for the prior three year period don’t exceed $7.5 million are exempt from AMT. Depreciation on tangible property is calculated differently for AMT than regular tax.  This adjustment affects everyone under AMT. There are other adjustments and preferences that can also apply.  Urish Popeck tax professionals can assist with the complexities of AMT. Please contact us if you need assistance.
Categories: Tax