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Should you fear your Federal Income Taxes may be higher because of 'AMT'?

The Alternative Minimum Tax system (AMT) was designed in 1969 to guarantee that wealthy taxpayers didn't use tax breaks to avoid paying their fair share of taxes. It is a parallel tax system that applies to some taxpayers over a taxable income threshold amount. You could owe AMT if your taxable income in 2011 was greater than:

  • $37,225 if Married Filing Separately
  • $48,450 if Single or Head of Household
  • $74,450 if Married Filing Joint or a Qualifying Widow

Just because you are over the threshold amount does not mean you will have an AMT amount added to your tax liability. You need to have income or deductions of a certain kind. These are commonly call AMT preferences and require adjustments from the original income or deductions amounts. The list is too long to include here but some of the ones that are more common to many taxpayers are:

  • Investment income deduction reported on 4952
  • Refund of state and local taxes
  • Home Mortgage Interest adjustment
  • Exercise of Incentive Stock Options
  • Refiguring of Post 1986 Depreciation
  • Passive activity filed on 8582 or from Publically Traded Partnerships
  • Installment Sales

Other less common preference items include Qualified small business stock exclusion, Intangible drilling costs, Research and experimental costs, and Mining cost. The AMT amount is calculated by comparing your total normal tax liability to the total tax after adjustments from the preference items. If the AMT tax is greater than the normal tax, you add the difference as your AMT.

The IRS provides some free help with the AMT Assistant. It is an online tool to help taxpayers answer whether they owe the tax. You answer some questions about entries on your Federal 1040 and the AMT Assistant does the rest. You will get an answer that you do not owe the AMT or that you must do some more work and complete more very long forms to determine if you owe the AMT.

If you use PC tax software, on-line services or a tax professional you will get the answer when your tax return is completed. If you are uncertain if you should be paying AMT, consult a tax professional to review your tax situation.

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