Alternative Minimum Tax (AMT) applies to an increasing amount of taxpayers each year. This tax was designed to eliminate the wealthy from using loopholes in order to pay fewer taxes. While this seems to work for the wealthier people, the middle classes are finding themselves more and more eligible for this tax. AMT is another tax that is placed on top of the regular income tax. If your tax bracket falls below the norm then the AMT comes in and you have to end up making the difference.
If AMT applies to you then it is really important to understand this law and how it works so you can plan accordingly. A few things happen when the AMT kicks in, regular deductions no longer apply and sometimes are no longer counted. In place of these deductions there is an AMT deduction that is designed to prevent this tax to apply to lower income taxpayers. Besides these deductions the rates are much higher than the regular income tax.
In order to figure out what your AMT tax will be, you have to first find out how much credit is available. You have to find out how much of your liability comes from timely items or things that allow you to report delayed income. Filling out a Form 8801 does this. Note, this credit can't be used if you have to file the AMT for the current year.
There are many things that cause alternative minimum tax some of them include:
- Standard Deductions
- Itemized deductions for the state
- Itemized deductions for a home equity loan interest (Doesn't include interest on a loan to buy, improve, or sell your home)
- State and Local Taxes
- Interest on Second Mortgages
- Medical Expenses
- Claims for accelerated depreciation
- Interest on activity bonds
- Miscellaneous Itemized Deductions
- Various Credits
- Incentive Stock Options
- Long-Term or large Capital gains
- Tax Exempt Interest
- Tax Shelters
- Deductions that relate to gas and oil investments
One thing to remember when doing your taxes is, if you file your taxes and you end up owing an AMT, the IRS isn't forgiving, they will charge you for the back taxes plus whatever interest or penalty there is on the money. A good rule of thumb when it comes to worrying about the alternate minimum tax, if you make over 75 thousand a year or you have a large amount of one of the items listed above, you should figure the AMT.
If none of this applies to you then the chances that you will owe a AMT will apply to you is very unlikely.
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