Can someone explain the Alternative Minimum Tax?

[maggiew]

Can someone explain the Alternative Minimum Tax to me in plain English? I read the Tax Act info plus wikipedia plus the IRS website and I don't get it.

Thanks,
Maggie

 

[mrsklamc]

Basically, it was designed to keep high income earners from avoiding what someone deemed 'their share' of the tax burden. So, even if they had so many deductions, they would still have to pay 'x' amount. The reason you keep hearing about it is that the law has not kept up with inflation, and the people who it is impacting are increasingly middle, rather than upper-class earners.

 

[vicki_c]

Without any politics involved, at its simplest (40 years ago), it was intended to prevent a small group of high income taxpayers from not having to pay any taxes due to their deductions, tax shelters, etc.

Over time, because the thresholds weren't indexed for inflation, the amount of households subject to the AMT grew hugely. People with a lot of kids and in states with high income tax rates are more likely to be hit with the AMT.

That's about the sum of my knowledge on AMT.

 

[seashoreCM]

First you compute your tax in the normal fashion.

Then you compute your tax using a second set of rules, specifically with fewer allowable deductions and with one somewhat higher exemption. Two notable deductions eliminated from the second set of rules are state/local taxes (affects residents of high tax states) and the "personal exemption" (affects families with lots of kids).

You pay the higher of the two figures, although the actual calculation is roundabout. You put the first, normal, tax total on your return first. Then you put the difference between the second method total and the first total under it, and then you add them up.

Another reason why the AMT affects so many more people nowadays is that the tax rate was increased since the AMT was invented, from about 20 % to about 26%.

 

[debbiemomto4]

Effects us - 4 children. DH is unemployed now though so he will probably make less this year. Our federal return will only be $300 rather than $8000.
I HATE it!! We could really use that money now.
DH doesn't make that much considering we live in a NYC suburb and now nothing!

 

[maggiew]

OK. So when we did our taxes on TaxAct, it calculated a alternative minimum tax and added it to our "Amount Due". We were surprised by the "Amount Due" and compared this year's return to last year's return. The only difference was the Alternative minimum tax. So we clicked on the "Help" section of Tax Act and it had us go through a series of questions in regards to the AMT. The only thing that was relevant was our mortgage interest. We answered that the mortgage was used to buy the house (as opposed to a second mortgage, I guess). After answering those questions, it removed the AMT from our "Amount Due". But I am thinking to myself, if TaxAct originally calculated that we should pay the AMT, does it know better than us? I just don't understand it enough to feel comfortable. The only thing we have is mortgage interest. We have 2 kids. We make decent money, but we aren't Bill Gates trying to "hide" income with ridiculous tax write-offs (not that Bill Gates does that. I'm just using him as an example of "really rich" people).

Maggie

 

[Anne34]

OK. So when we did our taxes on TaxAct, it calculated a alternative minimum tax and added it to our "Amount Due". We were surprised by the "Amount Due" and compared this year's return to last year's return. The only difference was the Alternative minimum tax. So we clicked on the "Help" section of Tax Act and it had us go through a series of questions in regards to the AMT. The only thing that was relevant was our mortgage interest. We answered that the mortgage was used to buy the house (as opposed to a second mortgage, I guess). After answering those questions, it removed the AMT from our "Amount Due". But I am thinking to myself, if TaxAct originally calculated that we should pay the AMT, does it know better than us? I just don't understand it enough to feel comfortable. The only thing we have is mortgage interest. We have 2 kids. We make decent money, but we aren't Bill Gates trying to "hide" income with ridiculous tax write-offs (not that Bill Gates does that. I'm just using him as an example of "really rich" people).

Maggie

We are also in IL (high tax state) and have 3 kids. I am a stay at home mom & my husband makes a decent salary. We have been hit with AMT for many years!! It really sucks

 

[maggiew]

We are also in IL (high tax state) and have 3 kids. I am a stay at home mom & my husband makes a decent salary. We have been hit with AMT for many years!! It really sucks

And the IL tax just keeps getting worse and worse!

Maggie

 

[Jeff_G]

OK. So when we did our taxes on TaxAct, it calculated a alternative minimum tax and added it to our "Amount Due". We were surprised by the "Amount Due" and compared this year's return to last year's return. The only difference was the Alternative minimum tax. So we clicked on the "Help" section of Tax Act and it had us go through a series of questions in regards to the AMT. The only thing that was relevant was our mortgage interest. We answered that the mortgage was used to buy the house (as opposed to a second mortgage, I guess). After answering those questions, it removed the AMT from our "Amount Due". But I am thinking to myself, if TaxAct originally calculated that we should pay the AMT, does it know better than us? I just don't understand it enough to feel comfortable. The only thing we have is mortgage interest. We have 2 kids. We make decent money, but we aren't Bill Gates trying to "hide" income with ridiculous tax write-offs (not that Bill Gates does that. I'm just using him as an example of "really rich" people).

Maggie

You might want to check to make sure your TaxAct is updated, I know with my tax program they released the program back in 2010 before congress had extended the tax cuts. One item that was in question was AMT, without the extension the AMT exemption was something like $45,000 for MFJ, after the tax cut extensions its $72,450.

So before the extensions I was going to owe a massive amount...

 

[Shelli_5]

http://apps.irs.gov/app/amt2010/

I went through & answered these questions to determine if I had to pay the AMT. It was very easy to do. Thankfully, my answer was "no."

Shelli

 

[*Seanaci*]

Wow. I had no idea about the AMT. Thanks OP for posting and asking what it was.

And thanks to those with info regarding it. DH and I are planning on doing our taxes via web here pretty soon. So, I'd better check into this before we start so we know whether or not we'll be subject to it.

 

[drinkme]

OK. So when we did our taxes on TaxAct, it calculated a alternative minimum tax and added it to our "Amount Due". .

I just wanted to make a comment about TaxAct. I have used that for years. This year, it said we owed around $8000 in taxes! We knew we were going to have to pay this year, but we didn't realize that much. I ended up using TurboTax and we only had to pay $730. I don't know what we did different, but now I'm wondering if it was the AMT from TaxAct.

I will never use TaxAct again. Now I'm wondering about all of my previous years of filing!!!!

 

[seashoreCM]

Look at the various forms that your tax prep program proposes filling out and printing for you. If a "6251' form is included and an entry is made for AMT on the back side of your '1040' then some AMT was computed.

 

[crisi]

I just wanted to make a comment about TaxAct. I have used that for years. This year, it said we owed around $8000 in taxes! We knew we were going to have to pay this year, but we didn't realize that much. I ended up using TurboTax and we only had to pay $730. I don't know what we did different, but now I'm wondering if it was the AMT from TaxAct.

I will never use TaxAct again. Now I'm wondering about all of my previous years of filing!!!!

I'm not sure accepting the cheaper one and moving forward without understanding way is wise. Many years ago, one of the tax software packages let us take a child care credit we weren't entitled to. It should have been simple logic to apply (if you make more than X you don't qualify) but that logic wasn't there.

The IRS will make YOU take responsibility for miscalculations in your tax software. You will still be responsible for penalties and interest - although they might listen to you and waive the penalties. Interest sucks on taxes - its pretty high and can come back a few years later to double your tax bill.

Manually understand the differences and make an informed decision.

 

[drinkme]

I'm not sure accepting the cheaper one and moving forward without understanding way is wise. Many years ago, one of the tax software packages let us take a child care credit we weren't entitled to. It should have been simple logic to apply (if you make more than X you don't qualify) but that logic wasn't there.

The IRS will make YOU take responsibility for miscalculations in your tax software. You will still be responsible for penalties and interest - although they might listen to you and waive the penalties. Interest sucks on taxes - its pretty high and can come back a few years later to double your tax bill.

Manually understand the differences and make an informed decision.

Thanks for the heads up! I was expecting us to owe about the same as last year. We owed around $450 last year. This year is was $620 (not $730 like I posted above, that was an amount for something else...lol.). The $8000 was so out of the range. But I'm going to see what the difference is between TaxAct and TurboTax.

 

[Green Tea]

http://apps.irs.gov/app/amt2010/

I went through & answered these questions to determine if I had to pay the AMT. It was very easy to do. Thankfully, my answer was "no."

Shelli

My answer was yes, to fill out the form to see if I was subject. Turbo Tax said I was , and tacked a lot onto the tax obligation. This AMT sucks.

 

[deva]

Specifically regarding the mortgage interest deduction...you cannot deduct interest on a home equity loan if proceeds were used for other than improving your home. I've used taxact for years (and I am subject to AMT), so I know their default is to NOT deduct ANY mortgage interest for AMT purposes at first pass. You then need to go check box or something and say what, if any, interest was from home equity and used for other than home improvements. Once answering this, all the interest (or eligible amount if you had some that is not allowed) counts as AMT deduction and your liability is recalculated.

Generally speaking, as others have said, the AMT was designed as a trap for high income taxpayers claiming lots of deductions. It is a parallel tax calculation. You calculate tax liability under regular rules and then under AMT rules and pay the greater of the two. For AMT, many common deductions, most notably state and local taxes (including real estate taxes), are not deductible. The reason that more and more people are getting trapped by AMT is because the exemption (think of this as the "final" reduction in income before the tax rate is applied) had never been indexed for inflation. They've run a patch and bumped the exemption up for the past few years, but still not enough to equate for inflation.

 

[maggiew]

Specifically regarding the mortgage interest deduction...you cannot deduct interest on a home equity loan if proceeds were used for other than improving your home. I've used taxact for years (and I am subject to AMT), so I know their default is to NOT deduct ANY mortgage interest for AMT purposes at first pass. You then need to go check box or something and say what, if any, interest was from home equity and used for other than home improvements. Once answering this, all the interest (or eligible amount if you had some that is not allowed) counts as AMT deduction and your liability is recalculated.

I think this is exactly what happened in our case. At first pass, the program calculated AMT and applied it to our amount due. Then, when we went through the questions for AMT, we answered that our mortgage interest was from buying the house. TaxAct then removed the AMT from the amount due.

The interesting thing was that the program didn't prompt us to answer those questions. We spent a fair amount of time figuring out why our amount due was so high. We noticed the difference between last years and this year's return was the AMT. So then I clicked on "help" and read about the AMT and then it directed us to the questions about AMT. If we hadn't have researched a little, we might have just paid what it said at first. I wonder how many people will get caught by this?

Maggie

 

[Jax1023]

I've always done my taxes by hand. Always. This year I did them on tax act, and I'm not quite sure I trust the results. I'm going to redo them by hand when I get back from my vacation.

We would be subject the AMT, and tax act did not include it. Seems rdiculous that we fall into this category (late 20's, no kids, don't make what I consider to be a huge amount of money, my DH was still a post doc last year). But it is what it is.

My doubt of those free tax programs is increased. Once I do my taxes by hand, I will update and see if I can find a difference.