ThomasYork - Alternative Minimum Tax (AMT) For Individuals

Alternative Minimum Tax (AMT) For Individuals
Compiled by Monica A. Lawver, CPA

Congress designed the AMT (alternative minimum tax) in 1969 to target fewer than 200 high-income taxpayers that received so many benefits that they paid little or no income tax. The AMT system was not indexed for inflation, so it now affects millions of taxpayers, most of whom it was never intended to affect.

Each year, individuals must calculate their income tax two ways – using the regular tax rules and using the AMT rules. If the tax liability under the AMT system is higher than the regular tax liability, the higher amount must be paid. If the AMT liability comes out below the regular liability, then the AMT has no tax impact.

Differences Between Regular Taxable Income and AMT Income
The AMT imposes more tax on affected individuals by:
1. Excluding certain tax benefits by permanently disallowing certain deductions and taxing otherwise tax-free income, and
2. Deferring certain tax benefits by accelerating income into earlier years.

1. Exclusion Items
The following common deductions are permanently disallowed for AMT purposes:
•  State and local tax deduction
•  Mortgage interest on debt that was not used to acquire, build or improve your home
•  Miscellaneous itemized deductions (such as investment fees)
•  Personal and dependency exemptions ($3,500 per individual for 2008)

The most common income item that is taxable for AMT but not regular purposes is tax-exempt interest from certain private activity bonds.

2. Deferral Items
For AMT purposes, certain income items are accelerated into earlier years, and certain deductions are decelerated into later years. The most common of these deferral (or timing) differences are related to:
•  Depreciation deductions
•  Income from long-term contracts
•  Income from Incentive Stock Options (ISOs)

If, as a result of deferral items, a taxpayer's AMT is higher than regular tax, the taxpayer may receive an "AMT credit" to carry forward to a future year when the regular tax is higher than the AMT. (The credit may be used when the timing difference reverses, and regular income is higher than AMT income.)

Calculating AMT
AMT Exemption
In addition to the AMT/regular tax differences discussed above, there may be a difference due to the AMT exemption. When computing the amount of income that is subject to AMT, taxpayers subtract an exemption amount. In 2008, this exemption amount is $69,950 if married filing jointly, and $46,200 if single. However, the exemption starts to phase out for taxpayers with income above $150,000.

2008 Example
John and Jane Smith are married with 2 children, and file a joint tax return. Their tax under both the regular tax system and the AMT system are calculated below.

The Smiths must pay the tax calculated under the AMT system ($28,349) because it is higher than their tax under the regular system ($27,637).

Required Circular 230 Disclosure: Any tax advice included in this written or electronic communication was not intended or written to be used, and cannot be used, by the taxpayer, for purposes of avoiding any penalties that may be imposed by governmental taxing authority or agency, or promoting, marketing or recommending to another party any transaction or matter contained herein.

ThomasYork, LLP
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P.O. Box 3060
San Ramon, CA 94583
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		Regular Tax	AMT
Income	Wages	$185,000	$185,000
	Interest Income	1,900	1,900
	Income from Partnership	30,000	30,000

	Total Income	$216,900	$216,900

Deductions	Real Property Taxes	$(9,500)	0
	State Income Taxes	(11,000)	0
	Mortgage Interest (all used to buy home)	(36,000)	(36,000)
	Charitable Contributions	(5,500)	(5,500)
	Phaseout of Itemized Deductions	569	0
	Personal Exemptions (4 x $3,500)	(14,000)	0
	AMT Exemption Allowed	0	(63,600)

Taxable Income		$141,469	$111,800

Tax Must Pay Higher Amount		$27,637	$28,349