Think that you don’t have to worry about the Alternative Minimum Tax because you’ve paid it a few years in the past? Think again. This year, the IRS is cracking down on a certain set of taxpayers that supposedly lived so many yeas tax-free that it led to consumer backlash.
In theory, the AMT should never affect you, as it’s designed to target only very high-income people. However, as life changes and inflation is on the rise, many more people than the intended “super-rich” are paying the AMT, and the IRS is making sure that everyone who has to pay that tax will pay it.
The people most at risk make a little over $75,000 — in some parts of the country, that’s a luxurious income. However, in high cost of living areas, $75,000 doesn’t stretch as far as you might imagine. The AMT brackets are not adjusted for inflation and either are the deductions that trigger the AMT in the first place. Who’s at risk? Well, if you happen to have interest deductions from second mortgages (whether on the same home or a vacation home), capital gains, incentive stock options, and even high state and local taxes.
One thing that you must understand about the AMT is that it’s really a separate set of taxes aside from what you might be used to paying. If you are audited by the IRS and it’s found that you did owe the IRS their AMT money, you will have back taxes to pay, plus interest and penalties — ouch! Let’s make sure that you don’t have to go through that.
If you make $100,000 or more, you need to check your tax return over very carefully. The form in question that you will need to use is Form 6251. There are some tax breaks that you do get with the AMT, so it’s not all bad. Even though you have to add back in personal deductions, dependent deductions, and the standard deduction if you aren’t itemizing your taxes. You don’t get state, local, and foreign income savings, nor do you get to claim that wonderful home-equity loan interest if you aren’t using it for home improvements. You still get to claim it all if you have used the home-equity loan for home improvements — and you have records for every penny. Remember that the IRS doesn’t take your word for it, at all.
It’s not all doom and gloom with the AMT though. You do get a deduction — at the time of this writing, it’s $72,450 for joint filers, $47,450 for singles, and $36,225 for married people filing separately. Yet watch out — the exemption loses 25 cents for every dollar of taxable AMT income above $150,000 for couples and $112,500 for singles). This is not adjusted against inflation either, which means that as you make more money, it’s going to hit you harder.
The AMT rates are pretty rough — 26% on the first $175,000 and 28% on the extra. That can really take a bite out of your take home money.
The only thing you can do is make sure that you tread carefully — taxes are no joke, and if you’re in this category you should really think about turning the tax prep job over to a qualified CPA that has experience with things of this nature. Getting audited is far more costly than the CPA’s fee, and you should consider that as well. Overall, now is the perfect time to make sure that you know the ins and outs of your taxes — will you file them yourself this year, or have a tax preparer take care of it for you?