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Calculating Alternative Minimum Tax

how do i calculate alternative minimum tax

The easiest way to calculate Alternative Minimum Tax, which could mean a higher tax liability, is with an online tax application

As if the tax code weren’t complicated enough, many taxpayers have to worry about calculating the Alternative Minimum Tax (AMT) on top of their regular tax liability. The AMT is a separate parallel system of taxation that was originally intended to make sure wealthy taxpayers didn’t take too many tax loopholes, thus avoiding their fair share.

In recent years, however, it has caught many middle-class taxpayers in its net. This, you will remember, was a point of contention during the fiscal cliff controversy last December. Thankfully Congress decided to raise the AMT exemption rate and peg it to inflation. Still, many taxpayers have to worry about the AMT.

What is Alternative Minimum Tax and How is it different?

The AMT tax system was designed to make the tax system “fairer”. The Alternative Minimum Tax sometimes comes up with a higher liability by excluding many of the ‘loopholes’ of the regular tax system. Normally you can offset your tax liability with various exemptions, deductions, and credits .

It’s essentially a flat tax that doesn’t allow you to take the standard deduction, personal exemptions, or certain itemized deductions. On top of this, you have to add in some income that is excluded from regular tax. This means AMT can add up to be significantly higher than regular tax.

2014 Exemption Amounts:

Thankfully there are exemption amounts that prevent low- and medium-income households from having to worry about the Alternative Minimum Tax. If your income is less than the amounts listed below for 2014, you are exempt from the AMT:

  • Single – $52,800
  • Married filing jointly and qualifying widow(er) – $82,100
  • Married filing separately – $41,050
  • Head of Household- $52,800

Once you fall above the exemption amount, it’s a lot harder to determine whether you have to calculate AMT. Here are some of the things that could cause you to have to pay AMT:

  • Itemized deductions for state and local taxes, medical expenses, and miscellaneous expenses
  • Mortgage interest on home equity debt
  • Accelerated depreciation
  • Exercising (but not selling) incentive stock options
  • Tax-exempt interest from private activity bonds

If you want a more definitive answer about whether or not you have to bother with the AMT, the IRS provides a helpful little AMT Assistant on its website. Answer a few questions from the tax return you are working on and then the Assistant will either tell you that you don’t owe AMT or that you need to complete Form 6251 (see below).

How to calculate AMT

The way it works is that you have to calculate your tax liability under both the regular tax system and the separate Alternative Minimum Tax system.

Before you can set about calculating AMT, you must first calculate your adjusted gross income on your regular tax return. If you claim the standard deduction, you can find your AGI on line 38 of your 1040. If you itemize your deductions (which you should do before trying to figure out AMT) you can find AGI on line 41 of your 1040.

Use Form 6251 [Alternative Minimum Tax – Individuals] to calculate your tax liability under the alternate system.

Trying to calculate AMT by yourself using just the forms and instructions provided by the IRS is incredibly difficult. Instead, complete your return with an online tax program like PriorTax . PriorTax will automatically figure out whether you need to pay AMT.

If you need to get caught up on a previous year tax return, you can do so with PriorTax. Starting in January, you’ll be use PriorTax to e-file your 2014 Tax Return!

This entry was posted on Friday, March 8th, 2013 at 4:36 pm and is filed under Tax Tips. Tax Tips: Credits & Deductions. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response. or trackback from your own site.

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