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|
|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.