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What is the alternative minimum tax?
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| If you think that your
tax return is complicated today, just wait a few tax years. More
and more middle class families are finding that they are subject to the alternative minimum tax
on their tax returns - which was originally designed to charge an additional tax on certain tax
preference items commonly deducted by the rich on their tax returns. The tax laws give preferential
tax treatment
to certain kinds of income and allow special tax deductions and tax credits for some kinds of
expenses on tax returns. The alternative minimum tax attempts to ensure that all individuals who benefit
from these tax advantages will pay at least a minimum amount of tax on their
tax return. The alternative minimum tax is a separate tax computation that, in effect, reduces the
tax benefit of certain tax
deductions and tax credits on your tax return, thus creating a tax liability for an individual who would
otherwise pay little or no tax on his/her tax return.
The alternative minimum tax is particularly effective in ensuring people pay some minimum amount of tax
to the IRS after they've taken advantage of tax credits and tax deductions
on their tax return. Some middle income families
may find the $1,000 Child Tax Credit and college tax credits will force them to calculate
alternative minimum tax
You may have to pay the alternative minimum tax
on your tax return if your taxable income for regular tax
purposes, plus any of the adjustments and tax preference items that you took
on your tax return, is more than a
specified exemption amount.
The following items are subject to the
alternative minimum tax
 | accelerated depreciation in excess of straight line depreciation; |
| circulation expenses; |
| depletion; |
| foreign tax credit; |
| income from long term contracts computed under the percentage of income method; |
| income from the exercise of incentive stock options; |
| intangible drilling costs; |
| installment sale income (certain types); |
| interest on home equity debt used for non-residential purposes; |
| investment expenses; |
| itemized tax deductions for
tax, medical expenses, and miscellaneous expenses; |
| mining exploration and development costs; |
| net operating loss
tax deductions; |
| passive income or
loss tax deductions; |
| personal tax exemptions; |
| pollution control facility amortization; |
| research and experimental expenses; |
| small business stock gains that qualify for the 50%
tax exclusion; |
| standard tax deduction; |
| tax exempt interest from private activity bonds; |
| tax shelter farm income or loss. |
The alternative minimum tax is a separate and parallel tax system directed at
taxpayers who pay little or no regular tax on their tax return because of the use of certain tax
deductions. There
are no "tests" to determine whether you are subject to the tax on
your tax return. You must
calculate your tax liability both ways on your tax return.
The individual alternative minimum tax
rate is 26% on all alternative minimum taxable income in
excess of an exemption of up to $70,950 on a joint tax return, $46,700 for a single
or head of household person's tax return,
and $33,475 for married persons who file separate tax returns. The rate is 28% starting at
$175,000 ($87,500 for married persons who file separate tax returns) of alternative minimum taxable income in excess of the exemption.
Here's how to calculate the alternative minimum tax
on your tax return:
| Determine if you took a
tax deduction that would require you to calculate the alternative minimum tax
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| Complete Form 6251 to see if
you owe alternative minimum tax. |
| On this form, you calculate your income under the
alternative minimum tax formula. You add back to your
income special tax benefits, so-called "tax preference items," such as child tax
credits. |
| You subtract from this
alternative minimum tax income the exemption shown above. The result is taxed at 26% for a couple's first
$175,000 in income; 28% above that. |
| If the resulting
alternative minimum tax exceeds the regular tax on your tax
return, an alternative minimum tax liability equal to the
difference results. |
Alternative Minimum Tax Credit
If an alternative minimum tax liability occurs because of certain tax deductions or
tax credits not fully allowed for alternative minimum tax purposes (non-exclusion preferences), the
alternative minimum tax credit can be used to decrease
regular tax liability in a later tax year on your tax return. In most cases, this
alternative minimum tax credit reduces the impact of
the alternative minimum tax by effectively refunding some or all of the alternative minimum tax
paid on your tax return. Thus, in some cases, alternative minimum tax planning may be a matter of timing-payment of
alternative minimum tax now and reducing regular tax on your tax return in the
future.
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Related tax
information about alternative minimum tax |
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| General Tax Questions |
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IRS publications about
the alternative minimum tax:
To determine if you may be subject to the alternative minimum tax, see
the Form
1040 instructions for line 45, or refer to Form 6251,
Alternative Minimum Tax. Also see
IRS Publication 17, Your Federal
Income Tax. |
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Ask Julian Block your IRS and tax questions! |
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If you can't find the answer to your IRS or tax question in our
web you can call former IRS Special Agent and one of the country's foremost tax attorneys, nationally syndicated columnist ("The Tax
Adviser") Julian Block. Julian is also the tax Editor of Mutual Funds Magazine, America's premier investment magazine. To
call Julian for a tax consultation click
here. |
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