Alternative Minimum Credit – Is it for You?

Find out more about the AMT

The dreaded alternative minimum credit (AMT) was once publicly considered the bane of the United States tax code, but it has faded into the background and many people don’t even know it exists. Well let’s shed some light, because if you are required to pay it and you don’t, the IRS may come after you.

What is the AMT?

Back in the 1970s, the fed decided that wealthy taxpayers needed to pay their share and the AMT was the guarantee that they would. Back then, wealthy Americans were paying tax professionals to find loopholes and wiggle room to lower their tax liability.

So the lawmakers implemented the AMT to target the wealthy, but since the law hasn’t kept up with inflation, it’s affecting the middle class now too. The AMT tax brackets and exemptions have only been adjusted to keep up with inflation twice in the last 30 years, but the national standard tax brackets have been adjusted annually. So taxpayers make more to pay more for food, services and products that also get more and more expensive and this rise in wages overall has put the middle class squarely in the AMT’s crosshairs.

How exactly are you supposed to know if you have to pay it? Tax software helps there. H&R Block and TaxCut will both let you know if you are required to pay the AMT. If you pay a CPA, he or she should also be able to tell you. Unfortunately, many people don’t ask or they file on their own and don’t know and they don’t find out until that red audit letter comes in the mail.

Do I Have to Deal with Paying the AMT?

If you make more than $100,000 per year, you will probably have to pay the AMT. Check with a tax professional, tax software or have a look at Form 6251 to find out for certain. Regardless of who you ask, make sure you read up on the AMT; it may save you money in the long run.

The real kicker with the AMT is that personal and dependent exemptions, standard deductions, property taxes and certain itemized deductions don’t even get taken into consideration. Home improvements made using the Home Equity Line of Credit (HELOC) will be added back on to your adjusted gross income (AGI) when calculating your AMT. Itemized deductions from business, investments and a few medical expenses are also not recognized by the AMT. Basically, all the hard work you put into legally lowering your AGI becomes irrelevant for the AMT.

So What Am I Supposed to Do Now?

The AMT is more tax on top of your taxes. That means if you’ve done your regular return and you’ve calculated your taxes at $40,000 and your AMT at $51,000, you have to pay your $40,000 plus the difference, so it’s an additional $11,000 for just the AMT.

The fed recently made a small update to the AMT that took 18 million Americans out of the equation, but 4 million taxpayers will still get hit by the AMT.

The only thing you can do right now is pay it and hope that the lawmakers can figure out a way to make this law keep up with the times. Until then, write a letter to your Congressperson urging them to do something to change this outdated law.

Click here for more information about the AMT on the IRS website.