Think the rich don’t pay enough taxes? The Alternative Minimum Tax, or AMT, was intended as a means to ensure that everyone pays a minimum amount of taxes. However, even though the AMT was originally intended as a means to get the rich to pay, it has spilled into the middle and lower class tax returns and has become a bane of tax preparation in Houston. Read on to learn everything you need to know about the Alternative Minimum Tax.
What is the Alternative Minimum Tax?
The main reason the AMT has gotten out of hand is because the income threshold that was 
initially calculated into the Alternative Minimum Tax has not risen in pace with the level of the income of the average tax payer. Leave it to the IRS to implement a new rule for your own good then not adjust it accordingly to hurt you. The short of it is: it’s estimated that an additional 5 million American tax payers have to adjust to meet the AMT, costing them an extra $35 billion in taxes.
In short, when you take credits, deductions, and exemptions from your taxes, it reduces the amount of income earned in a year. And if you reduce too much, the AMT swoops into make sure you pay enough. It essentially increases your income in an artificial way so as to add back some deducted items in addition to bringing back other tax free income in your tax preparation.
Tax Preparation Items That Trigger the Alternative Minimum Tax
There are many items which may cause the AMT to kick in, which can include
- State Income Taxes (not applicable for Texas)
- Real Property Taxes
- Home Equity Loan Interest
- Tax Exemptions for Independents
Alternative Minimum Tax 2014
How do you know if you will be penalized under the Alternative Minimum Tax? In short, if you make more than $52,800 when filing as an individual or more than $82,100 when filing jointly, you may have to pay the AMT. Please note that these rates are only for 2014, and that the rates for 2013 were $51,900 for those filing as single and $80,800 if filing jointly. The rates are expected to change for 2015 and so on.
Tax Preparation to Avoid the Alternative Minimum Tax
There are ways you can plan in the future to not pay the AMT, especially if you have done so in the past. For example, those who are self-employed can at times use the Simplified Option for deducting the use of their home office. Using the specialized Form 8829 (Expenses for Business Use of Home) allows the tax payer to deduct their real estate taxes against self-employment income, which does not affect the AMT.
Those who fill out state returns and received a refund should not file this as income on their regular tax return. No corresponding deduction is received for state taxes, and as such shouldn’t be included in AMT income.
Finally, if you have college aged children living at home, do not claim them as dependents if you think you may owe AMT. This exemption is not allowed under the Alternative Minimum Tax, and there are more benefits to having the students claim themselves in their own tax preparation. This can also help them receive educational tax credits and deductions.
How Do I Know if I Need to Pay the Alternative Minimum Tax?
If you meet any of the qualifications above, there is a good chance you may have to pay the AMT. But to really be sure, there is The IRS AMT Assistant. Click on it to get an assistant that will ask you for tax information and let you know if you need to pay the AMT.
How to Use the AMT Assistant
In short, if you received or claimed any of the below items in the tax year, you must complete Form 6251 (Alternative Minimum Tax – Individuals). This is only a partial list.
- Accelerated Depreciation
- Tax exempt interest from private activity bonds
- Any general business credit in Part I on Form 3800
- Empowerment zone and renewal community employment credit
- Qualified electric vehicle credit
- Alternative fuel vehicle refueling property credit
- Credit for prior year minimum tax
- Income (or loss) from tax-shelter farm activities or passive activities
- Income from long-term contracts not figured using the percentage-of-completion method
- Interest paid on a home mortgage NOT used to buy, build or substantially improve your home
- Investment interest expense reported on Form 4952
- Alternative minimum tax adjustments from an estate, trust, electing large partnership or cooperative
Tax Preparation in Houston
And if you are in need of expert tax preparation services in Houston or the surrounding area, please contact us.