Congress created the Alternative Minimum Tax (AMT) as a way to ensure that high-income Americans cannot avoid their income tax obligations by taking advantage of many of the tax breaks that exist for those who are millionaires. However, under the provisions of the tax law and the AMT, upper-middle class subjects will also be affected.

The AMT should be viewed as a completely different tax system from the typical federal income tax provisions that apply to most Americans. For example, some types of income that are exempt from tax under the regular tax provisions will be taxed under the AMT system. In addition, the AMT does not allow certain types of tax deductions, which are allowed under the regular tax provisions.

Another difference lies in the maximum tax rate of the AMT, which is 28 %, as opposed to the regular maximum tax rate of 39,6 %. The AMT system also includes high exemptions: USD $80,800 for couples filing jointly and USD $51,900 for individual filings. However, these exemptions disappear if the income subject to the AMT exceeds a certain level and the maximum limit of the lowest tax rate of 28 % may not be very beneficial when it comes to very high figures.

Because of the way the Minimum Tax is calculated, it does not apply to most people. However, if the Alternative Minimum Tax exceeds your regular tax obligations, you will have to pay the higher amount.

Alternative Minimum Tax Common Triggers

You may need your accountant or tax attorney to review your financial situation to see if you should pay the Alternative Minimum Tax. However, there are several financial activities that could be indicators that you should pay the AMT.

High income: If your income is particularly high (more than $250,000), it is very likely that the AMT tax exemptions will lapse and you will have to pay the AMT.

  • High deductions for income and property taxes, both local and state: If deductions for these types of taxes exceed $20,000, you may be subject to the AMT system, since these types of deductions are not allowed under the AMT tax provisions.
  • You are married and have several children: According to the usual tax guidelines, you are entitled to several tax deductions if you are married and, even more so, if you have children. However, these deductions are not allowed under the AMT tax rules.
  • The incentive share purchase right was exercised when the price was lower than the market value of the underlying asset (In the money): Under normal tax codes, income from incentive share options is not taxable. However, under the provisions of the AMT, this income will be taxable.
  • You have many tax base reductions: Unfortunately, if you have many specific tax deductions (such as investment expense deductions, tax advice, filing fees, and business expenses, among others), these cannot be deducted under the provisions of the AMT and will be computed to determine the AMT.
  • You have many reductions in the tax base for depreciation of commercial assets: Reductions in the tax base for depreciation of the value of computers, furniture, equipment and other items used in your sole proprietorship, limited liability company, partnership or corporation subject to Chapter S of the Internal Revenue Code are not always permitted under the AMT tax codes. In order to include these deductions, the depreciation of the assets must have occurred over a long period of time in accordance with the AMT tax codes.
  • Private Activity Bond Interest: This type of bond interest is not taxable under normal tax codes, but is taxable under the AMT.

If any of the above situations are met, you will need to calculate your AMT obligations after calculating your tax obligations under normal federal provisions. The Internal Revenue Service (IRS) provides Form 6251 (Alternative Minimum Tax – Individuals) to calculate AMT obligations. If the AMT exceeds your normal tax obligations, you must pay the AMT amount.

Get help with AMT tax issues

The AMT doesnt just apply to millionaires. Upper-middle class people are often surprised that they also have to pay the AMT. Even if only one of the above risk factors is met, you should discuss your tax situation with a lawyer who is knowledgeable about the AMT tax provisions. The AMT tax codes are complex and difficult to analyze, especially for a person who has never had to face the payment of the Alternative Minimum Tax before. It pays to be well informed about your taxes in order to avoid the application of retroactive taxes, interest adjustments and penalties.

Talk to a Qualified Alternative Minimum Tax Lawyer Today

This article is intended to be useful and informative. But legal issues can become complicated and stressful. A qualified alternative minimum tax lawyer can address your particular legal needs, explain the law, and represent you in court. Take the first step now and contact a qualified alternative minimum tax lawyer near you to discuss your specific legal situation.