A Brief Overview of the Alternative Minimum Tax
It's the time of year to start talking about taxes. I used to do my own taxes, but it was always a frustrating experience. Eventually I learned that by paying somebody else to do them, I was actually saving money. Because my accountant actually knows what he's doing, he gets all the deductions I'm entitled to.
This year, I've heard a lot of talk about the Alternative Minimum Tax (or AMT). Every time I begin reading about the AMT, my head swims. Fortunately, a couple of other people do understand the AMT and have written about it lately. First, Nickel sat down and answered the basic question: What is the Alternative Minimum Tax? He writes:
The AMT is a parallel tax system with rates ranging from 26%-28%. If your liability is higher under the AMT than under “standard” income taxes, then you have to pay the AMT. Given that standard tax rates top out at 35%, this doesn't sound too bad. Unfortunately, the AMT also disallows many routine deductions, resulting in a potentially large tax liability.
Basically, if you have too many of certain deductions or exemptions, you may be subject to the AMT. The details are arcane, however. According to Fairmark's list of the top ten things that cause AMT liability, even routine deductions can trigger the Alternative Minimum Tax. Yahoo! Finance has a guide to understanding the Alternative Minimum Tax, which explains you're more likely to be subject to the AMT if any of the following are true:
- Your gross income is greater than $100,000.
- You have many personal exemptions.
- You have “significant” itemized deductions, such as state taxes, and (sometimes) home-equity loan interest.
- You had a large capital gain.
- You own a business.
If you'd like more information about this topic — which I admit is dry, but could be very important to some people — BxCapricorn at The Fine Art of Money has an excellent detailed article called Alternative Minimum Tax — Why Care?. You can also read more about the AMT here:
- Wikipedia: Alternative Minimum Tax
- Internal Revenue Service: Alternative Minimum Tax assistant for individuals
To be honest, after reading all this information, I still have no idea whether I'm subject to the AMT. What are “significant” itemized deductions? How does owning a business trigger the AMT? I've decided not to worry about it. This is yet another reason I'm happy to pay an accountant to sort out my taxes.