Beware the costly, complicated AMT
Three letters, AMT, are striking tax fear in the hearts of more and more middle-class filers.
These folks are simply trying to use the tax code, legally, to lower their annual Internal Revenue Service bills. They claim exemptions for eligible dependents, deduct the interest on their mortgage and associated equity loan, and write off the state income taxes they pay. Some of these tax breaks, however, will do them no good under the alternative minimum tax system.
Commonly referred to as the AMT, this tax has its own set of rates (26 percent and 28 percent) and requires a separate computation that could substantially boost your tax bill. Basically, it's the difference between your regular tax bill, figured using ordinary income tax rates, and your AMT bill, figured by filling out more IRS paperwork. When there's a difference, you must pay that amount, the AMT, in addition to your regular tax.
The AMT was designed in 1969 to ensure that wealthy taxpayers didn't use loopholes to escape paying their fair share of taxes. The original target was 155 filers with the then-exorbitant income of $200,000 who avoided paying any federal taxes.
Permanent AMT relief
When an AMT payment is required, affected taxpayers could end up paying thousands more in taxes.
That possibility has been a major threat since the alternative tax's creation because it was not indexed for inflation. Without that annual adjustment, a yearly raise of a few percentage points meant a taxpayer was closer to or even into the income realm that the tax law deemed almost 40 years ago as prime AMT bait.
You could owe AMT if your taxable income in 2012 was more than:
- $78,750 for a married couple filing a joint return and surviving spouses.
- $50,600 for singles and heads of household.
- $39,375 for a married person filing separately.
In past years, Congress bumped up the earnings amounts to keep more middle-income filers from paying more under the AMT system.
And on Jan. 2, 2013, with the enactment of the American Taxpayer Relief Act, the AMT was permanently indexed for inflation.
Calculation insult to tax injury
Adding insult to injury, the AMT's parallel system demands that taxpayers do more work to pay more in taxes. The effort is required in filing paperwork (the dense, two-page Form 6251, Alternative Minimum Tax -- Individuals) and maintenance of separate records for regular and alternative tax purposes.
Even filers who escape actual payment of the higher tax still must do additional work just to learn that they are off the AMT hook.
To help sort through the AMT mess, some taxpayers turn to computer software packages, most of which include AMT computation, or hire professional help. Both choices should help you stay on the IRS' good side, especially if you owe AMT, or at least put your mind at ease if you don't.
But the options also will add to the overall cost of calculating your tax bill.
Free help in figuring your AMT
For the last couple of years, the IRS has provided some free AMT calculation assistance.
AMT Assistant is an online tool to help taxpayers determine whether they owe the tax. You just answer a few questions about entries on your draft 1040 and the system does the rest. Based on your entries, the calculator will tell you that either you do not owe the AMT or that you must go further and complete more computations to find out if you owe the AMT.
The AMT Assistant is especially welcome to filers who still do their taxes by hand, because the automated program essentially replaces the tedious work sheet taxpayers are instructed to use to determine if they fall under the AMT.
With the online program, says the IRS, most people will spend only about 10 minutes to find out their AMT fates.
There are a few special instances where a filer will need to take a few extra online steps, such as claiming the foreign tax credit, dealing with disaster-related tax issues or preparing a return for a child. But most taxpayers will need just Form 1040, completed through line 44, (that's the tax you owe under the regular system), and Schedule A if itemizing.