AMT affects federal income tax for many

October 1, 2007

Temporary legislative bandages expired at the end of 2006, so the stage is set for a dramatic increase in the number of individuals who are affected by the alternative minimum tax. Here's how to determine whether you will be one of them.

Keypoints:

A. You are one of many Americans who are feeling the bite of the individual alternative minimum tax (AMT). If you weren't familiar with the AMT, you are now, and there is a good chance that many others will be soon. Because its key figures aren't indexed for inflation, the AMT reaches further into the ranks of middle-income Americans each year. And because temporary legislative bandages expired at the end of 2006, the stage is set for a dramatic increase in the number of individuals who are affected (Figure 1).

The AMT essentially is a separate federal income tax system with its own tax rates and its own set of rules governing the recognition and timing of income and expenses. As you now know, as an AMT taxpayer, you must calculate your taxes twice, once under the regular tax system and again under the AMT system. If your income tax liability under the AMT is greater than your liability under the regular tax system, then the difference is reported as an additional tax on your federal income tax return.

How does a taxpayer know whether he or she is subject to the AMT?

Part of the problem with the AMT is that, without doing some calculations, there's no easy way to determine whether you're subject to the tax. Key AMT "triggers" include the number of personal exemptions you claim, your miscellaneous itemized deductions, and your state and local tax deductions.

If you have a large family and live in a high-tax state, there's a good possibility you might have to contend with the AMT. IRS Form 1040 instructions include a worksheet that may help you determine whether you're subject to the AMT (an electronic version of this worksheet is also available on the IRS Web site at http://www.irs.gov/), but you might need to complete IRS Form 6251 to know for sure.

AMT adjustments

Differences between regular and AMT calculations include:

AMT rates

Under the AMT, the first $175,000 of taxable income ($87,500 if married filing separately) is taxed at a rate of 26%. Taxable income greater than this amount is taxed at a flat rate of 28%.