Because some taxpayers, particularly wealthy taxpayers, were so successful in legally minimizing their tax bills, Congress came up with another way to tax them: the alternative minimum tax (AMT). Unfortunately, the AMT now catches even "middle income" taxpayers in its net.
The Alternative Minimum Tax (AMT) was initially enacted to prevent wealthy individuals from avoiding tax liability by strategies and investments that were generally out of reach for the average wage earner. However, the AMT was enacted with a set exemption amount that was not indexed for inflation and was not tied to changes in other tax provisions.
The causes the AMT exemption levels to lag far behind inflation and other tax rate adjustments. As a result, AMT liability began to affect middle-income taxpayers, not the super-rich for which it was originally intended. This meant that many taxpayers were required to compute their income tax liability twice: once under the regular method and once again under the AMT method.
Rather than fixing the system properly, Congress embarked on annual ritual of temporary patches. In late 2010, Congress extended a temporary "patch" relating to the AMT that had been put in place in 2008 in an effort to insulate middle-income taxpayer from the AMT. This spared an estimated 21 million taxpayers from having to pay AMT through 2011. Finally, the American Taxpayer Relief Act of 2012 (the "fiscal cliff" legislation) enacted a permanent fix to at least some of the issues bedeviling the AMT provisions.
The AMT provides a formula for computing tax that ignores certain preferential tax treatments and deductions that taxpayers would otherwise be entitled to claim and imposes a tax on this "alternative minimum taxable income."
The AMT is owed in addition to all other tax liability the taxpayer owes. Thus, if the AMT liability is higher than regular tax liability, then the individual will be subject to the AMT: the amount of AMT tax owed is added to the regular tax owed.
An individual's tentative AMT is generally equal to the sum of:
A specified amount of AMTI is exempt from AMT. The amount of the exemption varies based on the taxpayer’s filing status and the tax year involved. Beginning in 2013, these exemption amounts will be indexed for inflation—thus avoiding the mismatch between exemption amount, income and inflation that had caused so many problems with the AMT system.
For 2013, the exemption amounts are:
For 2014, the exemption amounts are:
In keeping with the Congressional purpose to extract tax from high-income individuals, the AMT exclusion amount is phased out as one's income increases. Although the AMT exemption amounts for individuals were increased and will be indexed, the threshold levels for calculating the exemption phaseout remain unchanged.
Thus, the exemption amount is reduced by 25 percent for each $1 of alternative minimum taxable income (AMTI) in excess of:
However, because the calculation of the phaseout amount is affected by the amount of AMTI exempted, an increase in the exemption amount will also increase the maximum amount of AMTI a person can have before the exemption amount is phased out.
The phase-out threshold is also adjusted for inflation beginning in 2013. Thus for 2013, the AMT exemption amount is reduced by 25 percent for each $1 of AMTI in excess of:
For 2014, the AMT exemption amount is reduced by 25 percent for each $1 of AMTI in excess of:
The most common items (preferences) that can cause you to become subject to the AMT are listed below. These items must be added back to your taxable income in order to compute your AMT:
If you have large amounts of any items in this list, and your adjusted gross income exceeds the exemption amounts discussed below, you (or your accountant) should compute your AMT liability on IRS Form 6251, Alternative Minimum Tax - Individuals, to determine whether you must actually pay any AMT.