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The Alternative Minimum Tax (AMT)

This article was written by in Taxes. 6 comments.


When Congress and the President extended the Bush-era tax cuts, taxpayers subject to the Alternative Minimum Tax (AMT) received a break. As Leigh Mutert, CPA discussed in our recent podcast interview, this is something middle class taxpayers need to know about now, because it effects the 2010 income returns that are being filed from now through the regular federal tax deadline on April 18, 2011.

In short, the income levels that are subject to the Alternative Minimum Tax increased for 2010 income.

The Alternative Minimum Tax

The Alternative Minimum Tax is a different method for calculating the federal taxes a taxpayer owes to the government. In some cases before the AMT, rich taxpayers were able to use deductions to reduce their income tax liability to zero, even if they earned millions of dollars. This IRS rule requires that those households above a certain income level will be subject to a different calculation, ignoring personal exemptions and the standard deduction. Some itemized deductions are still allowed.

In 1970, 19,000 taxpayers owed the Alternative Minimum Tax, which held a significantly different form at the time. The AMT as reformed in 1982 to be what we know it as today. One of the issues with the Alternative Minimum Tax is that the income levels are not indexed to inflation. In real dollars, the threshold at which point the AMT is applied shrinks every year inflation is greater than zero. Congress, however, usually intervenes and raises the floor periodically.

I am glad that these calculations are handled automatically by software like TurboTax and H&R Block At Home. Failing an automated calculation, the IRS will be sure to let you know if you were supposed to pay additional tax under the AMT rules.

Here are the basics of the AMT. For each filing status, a certain level of income is exempt from the calculation, but this phase-out decreases and eventually becomes zero — or in one case, less than zero — above another income level. There are two tax rates for all filers other than corporations. The numbers you need to know are in the following table.

Single Married Joint Married Separate Corporation
Low tax rate 26% 26% 26% 20%
High tax rate 28% 28% 28% 20%
High rate threshold $175,000 $175,000 $87,500 n/a
Exemptions (2009) $46,700 $70,950 $35,475 $40,000
Exemptions (2010) $47,450 $72,450 $36,225 $40,000
Phase-out begins $112,500 $150,000 $75,000 $150,000
Phase-out ends (2009) $299,300 $433,800 $216,900 $310,000
Phase-out ends (2010) $302,300 $439,800 $219,900 $310,000

The exemptions exist so taxpayers don’t result in paying 26% (or 28%) of their entire income, only on the income minus their exemption. The income calculation used for the Alternative Minimum Tax is not the same as Adjusted Gross Income (AGI) or Modified Adjusted Gross Income (MAGI). It is a specific calculation that uses tax form 6251.

Updated March 21, 2011 and originally published January 11, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 6 comments… read them below or add one }

avatar Apex ♦478 (Nickel)

Where did you get the Cap Gains rate of 25% that you list above? It has always been the case in the past that the Cap Gains rate under AMT was the same as the normal Cap Gains rate, namely a maximum of 15%. I did not see anything in the new tax law that changes this.

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avatar Luke Landes ♦127,550 (Platinum)

The information comes from Wikipedia and a few tax-related sources, but after checking the tax form, I see that the tax rate is 15% for regular capital gains and the 25% rate is for gains calculated as excess. The best explanation I can find is here in the US Code, Section 55(b)(3)(D).

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avatar Apex ♦478 (Nickel)

I believe the only place the 25% cap gain rate comes into play is on recaptured section 1250 gains which have to do with real estate depreciated assets and recapturing the amount of the gain that had previously been depreciated. That’s what the form 6251 seems to do and I think that is what that link you posted is trying to say although it seems nearly impossible to decipher exactly what that language is trying to say.

The wiki page on AMT does list the same chart you have but I think they made a mistake (unless they intend it to reference the section 1250 recapture gains which almost no one has). Early in the wiki article it mentions that AMT capital gains rates are the same as normal capital gains rates.

So the net is that AMT won’t make your capital gains rates higher but having large capital gains which will be taxed at only 15% can still cause your AMT tax to go up because it pushes up your overall income which will cause more of the AMT exemption to get phased out which in turn can raise the AMT tax on your not-capital gains income. Clear enough? Yeah, I thought so, as with everything AMT related. :)

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avatar jim

I wish they’d just index the thing to inflation and fix it for good.

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avatar Apex

Then they would have to admit the projected deficits are higher than they currently admit to. Both parties are happy to not have to do this. It’s a game and they all know it. The right thing, the sane thing would be to set it at a value they agree is appropriate, and index it to inflation as you say indefinitely. (they all agree the current value without the fix is inappropriate). It could be done as a singular AMT fix bill or attached to a different bill that extended the current fix indefinitely indexed to inflation. It’s simple. It’s easy. There is no conceivable reason not to do it. But it would require admitting other cuts or tax increases are needed rather than just pretending that they won’t do this patch every year. They are spineless. One of these years a fight will ensue and they won’t be able to agree on the patch and then the middle class will get hammered, and then they will stammer to try to quick fix it retroactively. That almost happened this year. Only an insane body would purposely allow this scenario to repeat itself year after year. They don’t inspire confidence for dealing with our much larger other fiscal issues.

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avatar eric ♦1,549 (Half-Dollar)

Sometimes I feel like I get AMT and then of course it quickly becomes a mess in my head. Thanks for the post.

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