Alternative Minimum Tax Explained (AMT Rules Explained 2018) (How Alternative Minimum Tax Works)

Alternative Minimum Tax Explained What is Alternative Minimum Tax AMT Rules Explained 2018 How Alternative Minimum Tax Works

Free downloadable handout:
https://www.dropbox.com/s/l9tjqk2k38e65ce/Alternative%20minimum%20tax%20Handout.docx?dl=0
What Alternative Minimum Tax?

Alternative Minimum Tax known as AMT is the minimum amount of tax one pays after certain adjustments and preferences are taken into consideration. If you have no idea what adjustments and preferences mean don’t worry we will discuss that shortly.

Visually what is happening is your taxable income is being calculated twice. The first calculation is done as normal under regular tax rules. The second and other calculation is the AMT calculation which follows AMT rules. After both calculations are complete if the tax calculated under the AMT rule method is higher than the tax calculated under the regular tax method than you have to pay the higher amount of tax under the AMT method.

If…..

AMT Tax is greater than Regular Tax = Pay higher AMT tax amount
The difference between the higher AMT tax amount and the regular tax is known as AMT.

Why does AMT exist?

It was originally designed to capture a small number of wealthy taxpayers who were avoiding income taxes. The wealthy tax payers had high incomes (Incomes of about $1,000,000 in today’s dollars), but could use numerous deductions to bring their tax to zero so to address this Congress enacted the AMT in 1969.

Unfortunately, to my understanding, many of the AMT phase outs were never adjusted for inflation since 1969 so what ended up happening is now the majority of the people who pay AMT are the middle class.

Where is AMT reported?

Amt is reported on form 6251 and the final amount of AMT tax to report is currently reported on 1040 pg 2 line 45.

Who is most likely going to need to pay AMT in 2018?

• Generally households with incomes ranging between $200,000 - $1,000,000. This doesn’t mean you can’t pay AMT if you make less than $200,000 it just means you are less likely to.
• Taxpayers who normally itemize vs. take the standard deduction
• Taxpayers who live in a high income tax state
• Taxpayers who typically were able to tax a lot of personal exemptions from several children. However, under the new tax laws I don’t think this will factor into AMT as heavily.

What can you do to minimize your chances of being subject to amt? Here a few things you can do

• Lower your adjusted gross income (Contribute to a 401(K), Health Savings Account, Traditional IRA, etc)
• Avoid states with high income taxes
• Increase charitable donations (Assuming you can itemize)
• Carefully time your long-term capital gain sales. These can bump up your income and make you more subject to AMT.

Easiest way to find out if you are subject to AMT

For individuals follow this link to IRS website tool:

https://apps.irs.gov/app/amt2017/assistant/process?execution=e1s1&format=

Or…. use tax software to help you calculate AMT.

AMT Preferences and Adjustments
List of Some Amt Preferences and adjustments
-Standard Deduction – Not available for AMT purposes. No deduction for AMT.
- Personal Exemptions – Not available for AMT purposes. No deduction for AMT.
- Mortgage Interest – Used to acquire or improve a residence is generally deductible for AMT, however, second mortgage, home equity interest, and interest on any portion of a refinance that exceeds the balance of the refinanced mortgage is not deductible under AMT.
- Medical and dental expenses – Only amount over 10% of your adjusted gross income is deductible for AMT purposes.
-Passive Activities – When we think of passive activities we generally think of rental real estate or other passive business interests. Passive Losses are limited to passive income. Under AMT rules passive gains and losses must be taken into account under AMT rules which is why there is a form 8582 form for AMT purposes.
-Tax Refund – Tax refunds (including property tax refunds) are not included in income for AMT.
-Taxes – There are no state and local tax, real estate or any other type of tax deductible for AMT purposes that I am aware of.
There are at least 11 more AMT adjustments not listed here. For a complete comprehensive list of AMT preferences and adjustments visit the AMTadvisor.com or follow this link to learn more: http://www.amtadvisor.com/AMT_adjustments.html

Links to learn more about AMT:

IRS Website Tool for AMT:
https://apps.irs.gov/app/amt2017/assistant/process?execution=e1s1&format=

The best website (in my opinion) to learn more about AMT: http://www.amtadvisor.com/

Cool stats about AMT:
https://taxfoundation.org/taxpayers-subject-alternative-minimum-tax/

http://reason.com/archives/2011/06/10/the-facts-about-the-alternativ

AMT Tax Form and Instructions:
Form 6251: https://www.irs.gov/pub/irs-pdf/f6251.pdf
Form 6251 Instructions: https://www.irs.gov/pub/irs-pdf/i6251.pdf

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