AMT starting point
How do you know, without using tax software or the AMT Assistant, if you might be caught in the AMT net? There are some indicators, but it's not always easy to tell.
The starting point for figuring any AMT is your regular taxable income. This is the stage where the AMT Assistant (or work sheet, if you still insist on doing things by hand) kicks in.
Basically, some of the deductions you claimed to figure your regular tax bill must be added back. These are known as tax-preference items. You also might find a special exemption amount is subtracted. The resulting amount is subject to the alternative tax.
Many of the tax breaks not allowed under the AMT system do affect predominantly wealthy individuals or businesses with complicated tax circumstances. These include incentive stock options, intangible drilling costs, tax-exempt interest from certain private activity bonds, and depletion and accelerated depreciation on certain leased personal or real property.
Common tax breaks disallowed
The AMT also rejects or reduces many common tax breaks used every year by individual taxpayers to lower their IRS bills.
For example, under the AMT, you cannot deduct state and local taxes. This is a major blow to many filers, because most states collect income taxes and all jurisdictions have some type of levy that generally can be counted against a federal tax bill.
If you are 65 or older, have lots of itemized medical deductions and fall into the AMT, you'll lose some of these deductions. Through the 2016 tax year, older taxpayers can claim medical costs that exceed 7.5 percent of their adjusted gross income. The AMT, however, only allows for medical expense deductions in excess of 10 percent of the filer's AGI. This isn't an issue for taxpayers younger than 65; they already must meet the 10 percent deduction limit on their Schedule A.
Miscellaneous itemized deductions, although limited under the regular tax system, are disallowed under the AMT. Even large families can be hit. If your personal exemption total is big, look out.
Own a home? Some cherished home-related tax breaks take an AMT hit. While mortgage interest on your main and second home is still AMT-deductible, home equity loan interest is restricted. It can't be deducted unless the money is used solely to pay for home improvements. Your home's property taxes also are disallowed as deductions under the AMT.
Other commonly claimed credits also technically affect AMT calculations, such as those for dependent care and education costs. However, for the past few years, the congressional AMT patch has allowed AMT taxpayers to continue to count these in their calculations.
Once you add back these AMT disallowances and run the numbers, you might be subject to a bigger IRS bill if your taxable income exceeds the annual exemption amount for your filing status.
If you find you must pay the AMT, the extra money you owe, along with the added paperwork hassle, is never welcome. But dealing with it now is better than the alternative: letting the IRS discover that you should have paid it. When Uncle Sam comes asking for back taxes, he wants interest and penalties, too.