What You Can Do to Avoid the Dreaded Alternative Minimum Tax

What You Can Do to Avoid the Dreaded Alternative Minimum Tax

In 1969 Secretary of the Treasury Joseph W. Barr testified before Congress that 155 taxpayers with incomes exceeding $200,000.00 hadn’t paid federal income taxes in 1966. With inflation, that $200,000.00 would equal roughly $1.5 million today. Those taxpayers were able to dodge taxes by exploiting existing tax breaks and maximizing their deductions, ultimately decreasing their taxable income to nearly zero. So, Congress created a second tax system known today as the Alternative Minimum Tax (AMT) in order to crack down on the wealthy. Unfortunately, as inflation has gradually caused incomes to rise, taxpayers in the middle class are now susceptible to this tax as well.

Who’s at Risk?

Triggers for the AMT include:

• Having a high household income ($1,000,000.00 for married couples filing jointly and $500,000.00 for all other taxpayers), especially those with a significant amount of itemized deductions.
• Realizing long-term capital gains – when you sell a home or other investments for a profit. These are taxed at the same rate under both the standard income tax and the AMT, but capital gains could put you over the threshold for AMT, thereby triggering it and disqualifying you from deducting state income taxes paid on the capital gains.
• Profiting from incentive stock options (ISO)
• Having a large family, specifically four or more dependents
• Having high medical expenses (the AMT limits this deduction)
• You have write-offs for miscellaneous itemized deduction items (such as investment expenses, fees for tax advice and preparation, and unreimbursed employee business expenses) under the regular tax rules

The Alternative Minimum Tax is a required alternative to the standard income tax. High-income earners are required to calculate their taxes twice – once under standard tax rules and again under the stricter AMT rules, which prohibit deductions such as state and local tax, childcare credits, and property taxes. After both calculations are done, taxpayers are required to pay the higher amount.

If you think you might be subject to the AMT, careful preparation year round and paying close attention to the above triggers should help to avoid provoking it.