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:

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.

More about...Taxes

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others
guest
31 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Heather
Heather
12 years ago

I’ve never really looked into it — what’s reasonable to pay someone to do your taxes? Is it best/easiest to go with the Big Guys like H&R Block, or find your own independent person?

Rich
Rich
12 years ago

Unfortunately, Congress screwed around again (I know, it’s a shocker) and didn’t approve 2007 AMT rules until mid-December.

This means that for all of us who might possibly be subject to AMT (I definitely am, in increasing amounts every year), we can’t even use the tax software out there until late February (in the best case scenario), as they have to re-program these parts.

Frustrating!

Justin
Justin
12 years ago

I’ll echo Heather’s questions. I wonder what a reasonable rate is for rather “run-of-the-mill” tax preparation.

Also, does anyone know if the tax software out there is any good?

William
William
12 years ago

We use a private firm local to us to do our taxes.. Our typical stacks of paper we get at the beginning of the year: W2’s Home Interest Statements School Loan tax statements (Wife owns a business) the ludicrous amount of paper required for that.. Many other paper forms.. We pay close to $500 for personal/business tax prep for the April income tax. My wife’s business pays around $5K/yr for constant accounting services, which includes tax prep consulting. One day a stinkin’ politician will grow a pair and simplify the G.D. tax code in the US.. But I won’t hold… Read more »

Lord
Lord
12 years ago

They omitted the most common reason, lots of children.

Nick K
Nick K
12 years ago

Yet another reason to give serious consideration to a national consumption tax which would replace all of this confusion, replace payroll deductions, put more of your paycheck in your pocket for YOU to decide where the money is spent, and make April 15th just another spring day!

This merits real consideration. This is not some wacko idea, but a real potential alternative to our current system.

Check it out!

Anne Keckler
Anne Keckler
12 years ago

It’s easy to do your own taxes, even without software. I’ve always done ours. Just read the instructions as you fill out the forms.

One year I thought we might come out better if we used a professional. After all, he’d know all the loopholes, right? Wrong. We were going to owe money! With three children and one income! I went back to doing it myself, and I’ve never regretted it.

JenK
JenK
12 years ago

One advantage to tax software is that it will calculate your taxes multiple ways and tell you if you owe more under AMT or via normal 1040. Also if you are married, whether you should file jointly or separately. That said, I have also many times used the pencil-and-paper “check if you owe AMT” checklist in the 1040 booklet. I consulted TurboTax online last year, and while it did help, it also seemed unable to handle some mutual fund transactions. (I blogged about the details at http://jenk.livejournal.com/tag/taxes – we ended up owing $1.) I will probably do the manual-with-online help… Read more »

Patrick
Patrick
12 years ago

I have a tax guy that helps me out with federal and state tax. Still, I calculate my taxes in a software application myself as well. If there are differences between his and my taxes, my tax guy and I will discuss.

I learned a lot from him through the years and caught little mistakes.

Sam
Sam
12 years ago

I think the only way to figure out if you are subject to the AMT is to run the numbers each year (at least that is my understanding).

We pay a CPA about $400 a year to do our taxes which includes fancy stuff due to our rental income, rental expenses and depreciation, etc. We have been using the same CPA for about 7 years and we are very happy with the service. His price depends on the number of forms/schedules.

J.D.
J.D.
12 years ago

Folks, I’m going to consolidate your questions about tax preparers (and software) into an “Ask the Readers” this Friday. It’s been nearly a month since we’ve had one of those, and this seems perfect. Sound good?

J.D.
J.D.
12 years ago

p.s. Kris and I pay about $400/year, too. (Don’t know the exact number.)

Mrs. Micah
Mrs. Micah
12 years ago

It’s nice to know that I won’t be eligible for it. I’m wondering how to handle all my different incomes in different states this year. Maybe next year will be better.

TosaJen
TosaJen
12 years ago

I ran Turbotax and state taxes with rough numbers last week, just to see whether we should do some last minute tap-dancing to reduce our taxes (shelter some money in 529s and pay property taxes in 2007 — we decided to do neither). Turbotax is partially fixed for the last-minute AMT changes, so it looked like we would have paid over $1k before the changes, and we get over $2k back now. We got hit with AMT several years ago when we exercised some (startup dot-com) stock options, but we got AMT credits in subsequent years (done this year), which… Read more »

Dividends4Life
Dividends4Life
12 years ago

AMT reeks. It has hit me the last 3 years. I remember how furious I was the first time that form rolled out of Turbo Tax. Of course, I had not planned on it happening…

Best Wishes,
D4L

Sandy
Sandy
12 years ago

I go to H&R Block. Last year I paid them $162 total for both State & Federal tax preparation — they charge a certain amount for each form that they prepare for you. That amount can be deducted the following year. When there’s a refund, they can have the IRS electronically deposit that into your checking account.

Heather
Heather
12 years ago

Thanks for the answers so far, and I’ll look forward to your post on Friday, J.D. If it’s possible (or if anyone else wants to chime in)…maybe you could include some tips about which people should really consider getting a tax guy and which of us should just suck it up and do it ourselves. For example, I’m single with no dependents, just one income, with student loans and a mortgage, and no other investments….so I’ve always figured my taxes were simple enough to do myself, but who knows, maybe I’m missing some big deductions? How complicated do your finances… Read more »

Financialgal
Financialgal
12 years ago

We were subject to the AMT last year and probably will be this year ago. Under the tax code, state or local income taxes can be included in itemized deductions. However, in our experience, “significant itemized deductions” includes high state or local income taxes. So, if you live in a high tax state like New York or Maryland (vs. Florida, which has no state income tax), it is more likely that you would be subject to the AMT if you itemize and try to take those tax deductions.

m
m
12 years ago

Ms. Micah,

I had that problem before and had to get forms from each state. When I did it, there were special forms for people who had lived in more than one state within the year.

vh
vh
12 years ago

Great image: exactly expresses my sentiments on this topic! Because i are a english major, i are not a accountant, the whole subject leaves me with my head spinning. I have my returns prepared by a tax lawyer, who charges significantly less than the CPA I hired when I ran an incorporated business and who saves me significantly more. She (lawyer) normally charges about $400, but that includes the dribs & drabs of legal advice she also has provided over the year. She sends one statement in April that covers the entire year’s worth of legal advice, tax advice, and… Read more »

celeste
celeste
12 years ago

I did my 2007 estimated taxes and we were going to be hit with it. (I believe with Congress’s repeal this will no longer affect us.) This is laughable because in real income my husband and I make less than $70k per year. What triggered it is the taxable tuition benefits that I receive + taking a deduction for education. It’s just ridiculous. Being penalized for education? Something designed for millionaires triggering at $70k?

HollyP
HollyP
12 years ago

Being really cheap, I’m always on the look out for less expensive ways to get things done. The last two years I’ve used free online software through Tax Act. For basic service, you pay nothing but the $16 to file electronically.

My husband and I have many deductions and Tax Act’s free service has handled them all. (The first year I did my taxes on paper too, just to verify Tax Act was accurate.)

Ryan S.
Ryan S.
12 years ago

The last two years I’ve had to do that paperwork “test” in the 1040 to see if I had to pay the AMT, and fortunately, I didn’t. I believe my increasing income that’s due to dividends is the reason why, although I have not seen many people say that dividend income is a reason for AMT. I have no kids, unmarried, no house (wishing I had at least two of those though :).

Ryan
http://uncommon-cents.net/

Willie
Willie
12 years ago

Heather, Your situation sounds pretty simple to do. Give Tax Cut a try ($20.00 on the web). It is produced by HR Block, very simple to use and is much cheaper than Turbo Tax. When finished, print your return(do not file electronically, more $$), mail it in and your all set. I bet it will take you about 3-4 hours. I used to do my own paper returns but it took over 20 hours. I started using this software and cut that time in half. Also there are no math errors. I would never use an accountant. We all have… Read more »

SJean
SJean
12 years ago

Great post, very informative. Thanks!

Louise
Louise
12 years ago

I did my own taxes for many, many years. I’m a smart, math-oriented person and took pride in being able to figure out all the tax forms. Then I bought a business and came face to face with depreciation and amortization. AMT. Loss carry-over. I read the codes and the forms and the instructions. I researched it on-line. I spent hours trying to learn this stuff, and my brain just hurt. This engineer met her match at the complicated end of the income tax code and handed it all over to an excellent CPA. Just as I had spent my… Read more »

John
John
12 years ago

All I will say is FairTax.org…check it out!

BxCapricorn
BxCapricorn
12 years ago

Thanks to all of those that visited my site, and as TosaJen said, their taxes saw a $3K swing after the patch. I hope that this helped raise awareness for those who may find themselves overwhelmed by this parallel tax in the next few years. The tax planning you do this year is now more important than ever.

dr. sadah refei
dr. sadah refei
12 years ago

I am from Oman.I do not like america for what it stands for. a ripoff of tax professionals and trhe americans trhey do not revolt like the americans did during the Boston tea party. maybe H&R block rules in america but in my country there isno income tax.I know in america you have to have an income tax, but if you had any brain you would start a fair tax party. many of you will be stressed out by the tax season maybe get stroke or cardiovascular disears or suffer emotional problems. you almost are at the mercy of rippppoff… Read more »

tomek
tomek
11 years ago

“I do not like america for what it stands for. a ripoff of tax professionals and trhe americans trhey do not revolt like the americans did during the Boston tea party. maybe H&R block rules in america but in my country there isno income tax.”

No, kidding. And how do you pay your government? Where does your government get money to build roads, schools, hospitals??

By the way, nice article. Here is a good explanation of the AMT, perhaps it helps anyone. http://www.maxi-pedia.com/alternate+alternative+minimum+tax+AMT

Beth
Beth
9 years ago

I too wrote about the Alternative Minimum Tax. Check it out – http://www.bethbcpa.com/alternative-minimum-tax-%E2%80%93-champagne-tax-on-a-beer-budget-video/

shares