The Alternative Minimum Tax and AMP Tax Exemptions

The alternative minimum tax (AMT) made its debut in the late 1960s as a response to high-income individuals who had managed to get their tax bill down to almost nothing by maximizing all available credits, loopholes and deductions. The goal was to ensure that even those high-income taxpayers could not reduce their tax liability to zero via alternative minimum tax.

Will You Have to Pay the AMT?

Inflation and general increases in the American standard of living has seen this tax go from something that targeted mostly high-income individuals and investors to something almost every taxpayer must be aware of. It can be triggered because a filer took a single very large deduction, or because they took a number of smaller deductions. There are deductions that tend to trigger the AMT more frequently than others. State income tax deductions, personal exemptions, and 2nd mortgage deductions can be frequent triggers. The IRS provides Form 6251 for taxpayers to calculate this tax for themselves or by filing with us, you can allow our software to calculate AMT for you automatically.

An Alternative Set of Rules for AMT

Within the standard US tax code, there are seven income tax rates which start at 10 percent and top out at nearly 40 percent for the highest-paid individuals. However, using the AMT way of calculating an individual’s taxes there are just two rates: 26 percent and 28 percent. In addition to having fewer tax rates, many of the benefits an individual can usually claim as deductions are either reduced or done away with entirely. For example, the alternative minimum tax doesn't allow exemptions for dependents for parents or caregivers.

There is a broad deduction called the AMT exemption which is meant to prevent lower and moderate-income taxpayers from being caught in the AMT. This exemption phases out when income reaches the higher levels. However, it does not prevent all low-moderate filers from dealing with this tax.

The rules around this tax are now so complicated that the IRS has began offering a resource called the "AMT Assistant" to help determine whether or not individuals will get caught by this tax or not.