What is AMT and why is it Raising My Taxes?

by Charles R. Wold, CPA/PFS

In 1969 (With the Tax Reform Act of 1969) Congress introduced the concept of a minimum tax to prevent a small number of high-income taxpayers from avoiding payment of income taxes though the use of legitimate deductions, exclusions and credits.

In 1986 (With the Tax Reform Act of 1986) Congress created the current Alternative Minimum Tax (AMT), which is a separate and parallel tax system. In its present form, although it is called the Alternative Minimum Tax, it is a mandatory tax paid if it exceeds the regular tax liability. Unknown to most taxpayers, the AMT effectively eliminates or reduces certain common tax benefits such as favorable capital gains tax rates, the deductions for medical expenses, state income taxes, sales taxes, homeowner interest not used to purchase or improve principal or second residence, investment interest and accelerated depreciation deductions. There are a number of other, less common, benefits that are affected with the AMT such as stock options, mining costs, and intangible drilling costs.

With higher incomes as a result of inflation, the AMT is affecting many taxpayers who don’t consider themselves "high-income". The result is a "surprise" AMT tax, reducing the expected refund or increasing the balance due.

The tax rates applied to the Alternative Minimum Taxable Income is 26% on the first $175,000 and 28% on the excess over $175,000. The exemption amount for AMT is $42,500 for Single or Head of Household, $62,550 for married filing joint and $31,275 for married filing separate. These levels are not considered "high-income" by most taxpayers and it is easy to see why AMT is now affecting many taxpayers. (by the way, these exemption amounts are phased out at income levels starting at $75,000 for married filing separate, $112,500 for single and head of households and $150,000 for married filing joint)

So if you are taking advantage of any of the above-mentioned benefits, and your income exceeds the exemption amounts, you may be affected by AMT. If you think that AMT is reaching down into middle America, you might consider contacting your Representatives and Senators and urge them to increase the exemption amounts.

Note: Information in this article is based on 2006 tax laws

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