Alternative Minimum Tax (AMT) www.advancetaxrelief.net

The alternative minimum tax was originally enacted to ensure that high-income taxpayers pay at least a minimum amount of tax if they benefit from certain deductions and other tax preference items. The AMT tax computation is a parallel system to the regular tax system with its own definitions of income and expenses, rules for income recognition and timing, and exemptions and tax rates. Although every taxpayer is subject to AMT rules, the additional tax is paid only if the tax computation under AMT rules is higher than the tax computed under regular rules. Even though the AMT was originally targeted toward high-income taxpayers, factors, including inflation and treatment of certain tax credits, can sometimes push lower-income taxpayers into an AMT situation.

How AMT Works

Certain items called “adjustments and preferences” are added to federal gross income. Personal exemptions that reduce taxable income for regular tax purposes are not allowed for AMT purposes and are added back to taxable income. A separate AMT exemption amount is allowed depending on the taxpayer’s filingstatus. After the AMT adjustments and preferences are added to income, and the AMT exemption amount is subtracted, an AMT tax rate of 26% to 28% is applied. If the resulting tax is greater than regular tax, the difference is added to regular tax on line 45, Form 1040.

Example #1: When computed under regular rules,

John’s income tax is $4,700. When computed under
AMT rules, the tax amount is $3,900. Since his tax
computed under AMT rules is less than his tax computed
under regular rules, John will not pay any additional
amount for AMT.

Example #2: Assume the same facts as Example

#1, except when computed under AMT rules,
John’s tax amount is $5,100. Since his tax computed
under AMT rules is higher than his tax computed
under regular rules, John must pay the difference in
additional tax. John must report additional AMT tax
on line 45, Form 1040, in the amount of $400.
 
AMT Triggers
Items that commonly trigger AMT include high deductions for state income tax, dependent exemptions,
exercise of incentive stock options, and large miscellaneous itemized deductions reported on Schedule A, Form 1040. Other AMT adjustments and preferences include:

• Medical and dental expenses. A portion of these deductions must be added back for AMT purposes.

• Taxes from Schedule A, Form 1040.
• Certain mortgage interest deductions.
• Tax refunds reported on Form 1040.
• Certain investment interest expense.
• Certain depletion expense.
• Net operating losses.
• Interest from specified private activity bonds.
• A portion of gain from section 1202 small business stock.
• Certain gains from dispositions of property.
• Certain depreciation adjustments.
• AMT loss limitations.
• Certain circulation costs.
• Long-term contracts.
• Certain mining costs.
• Certain research and experimental costs.
• Pre-1987 installment sale income.
• Intangible drilling cost preferences.

 AMT “Patch”

Because the original AMT law did not include a provision to index the exemption amount for inflation, over the years, a growing number of middle-income taxpayers have become subject to AMT. Historically, Congress has limited the impact of the AMT by passing temporary legislation, often referred to as “patches,” to provide relief for millions of middle-income taxpayers who might otherwise be affected by AMT. Congress has patched the AMT every year for the past several years, but because the index for inflation is not permanent, the patches are always tied up in congressional budget battles. For tax year 2012, for example, the AMT patch was a significant part of the so called “fiscal cliff” phenomenon. In fact, an IRS letter to Congress stated that if AMT legislation was not passed by December 31, up to 60 million taxpayers would be affected. Under current law, the AMT exemption is scheduled to be reduced to the following amounts.

 

Filing Status 2011 2012*

Single or Head of Household $48,450 $33,750
Married Filing Jointly $74,450 $45,000
Married Filing Separately $37,225 $22,500
* The amounts listed will be the AMT exemption amount with no “patch” enacted by Congress.

 Example: In 2011, Ben and Wilma’s AGI was

$60,000. Their AGI was below the $74,450 AMT
exemption so they did not owe AMT. In 2012,
however, their $65,000 AGI is above the $45,000
AMT exemption. Therefore, they must calculate
their income tax by figuring the AMT using Form
6251, in addition to calculating their regular income
tax using Form 1040. For 2012, they will
owe $1,500 in AMT, in addition to their regular
income tax. Note: Ben and Wilma’s AMT
liability is eliminated if the AMT exemption is“patched.”

 

Personal Credits

Originally, nonrefundable credits on Form 1040, such as education credits, the Child and Dependent Care Credit, and the Child Tax Credit did not reduce AMT. In 2000, Congress allowed such personal credits to offset AMT.
However, the personal credit offset to AMT is also part of the AMT patch and expires each year unless extended by Congress.

Nonrefundable Personal Credits Currently Allowed in 2012

These credits will be available regardless of any AMT patch legislation. Form

Child Tax Credit............................................................ 1040

Retirement Savings Contribution Credit....................... 8880
Residential Energy Efficient Property Credit................ 5695
Plug-in Electric Vehicle Credit..................................... 8834
Alternative Motor Vehicle Credit.................................. 8910
Plug-in Electric Drive Motor Vehicle Credit..................8936
\Adoption Credit............................................................ 8839

Foreign Tax Credit and AMT

The AMT treatment of the Foreign Tax Credit depends on whether Form 1116, Foreign Tax Credit, is being filed.

Taxpayer elects not to file Form 1116.

• Report Foreign Tax Credit on line 47, Form 1040.
• Credit is limited to amount of regular tax.
• Unused foreign tax may not be carried over. Taxpayer elects to file Form 1116.
• Recalculate Foreign Tax Credit using AMT rules.
• AMT Foreign Tax Credit is used to offset AMT in Part II, Form 6251.
• Unused AMT Foreign Tax Credit may be carried back one year and carried forward ten years. [IRC §904(c)]

Credit for Prior Year AMT

The adjustments and preferences that result in AMT are of two types.
1) Deferral items, such as AMT basis adjustments, do not cause a permanent difference in taxable income over time.
2) Exclusion items, such as personal exemptions, are not allowed for AMT and therefore cause a permanent difference in taxable income. The potential exists for income from deferral items to be taxed twice — first under AMT, and again in a later year under regular tax. A credit against regular tax for prior year AMT is available to address this problem.

 

This article contains general information for taxpayers and should not be relied upon as the only source of authority. Taxpayers should seek professional tax advice for more information or contact Advance Tax Relief LLC

Noah Daniels, EA is the President of Advance Tax Relief LLC based in Houston, TX. Noah is very experienced in representing taxpayers before the examinations, collections and appeals divisions of the IRS and various state taxing authorities. Noah has helped hundreds of taxpayers nationwide resolve their tax problems with the IRS saving taxpayers hundreds of thousands of dollars in back-taxes, penalties and interest and the number keeps rising. He also speaks at various local organizations educating the public on how to handle their IRS tax problems, small business credits and tax compliance issues. For speaking engagements or for tax related questions email noah.daniels@advancetaxrelief.com.

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