Alternative Minimum Tax (AMT)

Some wealthy taxpayers have been successful in their efforts to legally minimize their tax bills. To fight this tax avoidance, 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. So, 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 state and local income 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 itemized deductions for any portion of medical expenses that exceed 7.5 percent of AGI but not 10 percent of AGI deductions you claimed for accelerated depreciation that exceed what you could have claimed under straight line depreciation (for property put into service in 1999 or later, this item will not apply to depreciable real estate, and it will generally apply only to 3, 5, 7, and 10-year property on which you claimed the ordinary MACRS 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. If you have large amounts of any items in this list, and your adjusted gross income exceeds the exemption amounts discussed below, you should compute your AMT liability on IRS Form 6251, Alternative Minimum Tax - Individuals, to determine whether you must actually pay any AMT.

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