Alternate Minimum Tax Flashcards
What is AMT ?
The present AMT system was originally created in 1978. It is no longer an add-on tax but is actually a separate and parallel tax system. Taxpayers are first required to compute their regular income tax liability, and then compute their tax under the AMT system. Taxpayers are required to pay the greater of either the regular income tax or the AMT.
The AMT system requires that taxpayers adjust their regular taxable income by a number of adjustments and preferences. An exemption amount is then subtracted to arrive at the AMT base. The AMT base is multiplied by the special AMT rates to compute the AMT.
Why does one have to pay Alternative Minimum Tax?
You might be subject to AMT if you earn income above a certain level and/or from certain sources (i.e., tax preference items and /or adjustment items), including: Incentive stock options. Intangible drilling costs. Tax-exempt interest from certain private activity bonds (PAB)
Who is most likely to pay AMT?
Taxpayers who had incomes that exceeded the AMT exemption of $81,300 (single), $126,500 (married filing jointly) and $63,250 (married filing separately) in 2023 may be subject to the alternative minimum tax when they file their 2024 tax return. AMT tax rates are 26% or 28%.
What strategy can be followed for AMT?
If a taxpayer was already subject to AMT, then the optimal strategy would be to accelerate income into the AMT year, and delay allowable itemized deductions until a regular tax year. Any income would be taxed at 26% or 28% rather than at a higher rate, while any deferred deductions (such as charitable contributions) might allow a deduction at a rate greater than 28%. However, care must be taken when utilizing this strategy. A taxpayer should not accelerate too much income into the AMT year or defer too many deductions into a regular tax year. A taxpayer should only accelerate income and defer expenses up to the point where tax liability under AMT equals the regular tax.
What are the most common characteristics of taxpayers who are subject to the AMT?
First, taxpayers who have materially invested in real estate before January 1, 1999 are likely candidates for the AMT because they will have a large positive adjustment caused from the differences in depreciation. Second, taxpayers who use credits to reduce their regular tax liability may well be subject to AMT because only certain tax credits can reduce the AMT. Third, taxpayers who have very large itemized deductions, primarily from large state and local taxes, may be subject to AMT because state and local taxes are not deductible for AMT purposes.
What is the AMT Tax Filing Procedures
Individuals must use Form 6251 to compute the alternative minimum tax (AMT). Form 6251 must be completed and attached to an individual’s tax return in any of the following situations:
An AMT tax liability actually exists.
The taxpayer has tax credits that are limited by the tentative minimum tax.
The AMT base exceeds the exemption amounts and an individual has AMT adjustment or tax preference items.
Why does the AMT exist?
In 1969, Congress noticed that 155 people with high incomes were legally using so many deductions and other tax breaks that they were paying absolutely nothing in federal income taxes. Their nonexistent tax bills were an embarrassment. So Congress instituted the AMT with the aim of making the tax system fairer.
How to avoid paying AMT?
A good strategy for minimizing your AMT liability is to keep your adjusted gross income (AGI) as low as possible. Some options: Participate in a 401(k), 403(b), SARSEP, 457(b) plan, or SIMPLE IRA by making the maximum allowable salary deferral contributions.
