Regular federal income tax rules can quickly get complicated. Now imagine, an additional layer of rules and complexity kicking in for taxpayers in certain income tax brackets! Say hello to the Alternative Minimum Tax (AMT).
Tax Tandem
AMT essentially is an income tax that operates alongside regular income tax. It sets a floor of “minimum tax” to pay and requires qualified taxpayers to calculate their tax liability twice, once under the regular rules, then again under the rules in AMT. The taxpayer must then pay the higher amount. AMT primarily affects high-income earners that leverage assorted tax exemptions, credits, and other advantages that in normal tax rules would often leave them with no tax liabilities. In the eyes of elected lawmakers that enacted AMT, these taxpayers were “not paying their fair share of tax.” AMT also use to exist for corporations as well, but was repealed with the Tax Cuts & Jobs Act of 2017.
Do I owe AMT?
You actually have to figure that out by calculating it through Form 6251. After entering your taxable income from line 15 on your Form 1040, you proceed through Part 1 re-calculating assorted “preference items” to tally up to your Alternative Minimum Taxable income (AMTI). Some notable preference items to be recalculated include:
- Taxes paid from Schedule A (E.g. SALT deduction)
- Net operating losses
- Depreciation on assets
- Exercise of incentive stock options
- Disposition of property
- Research and experimental costs
Then your AMTI is deducted by the exemption, which changes each year (for 2020, $72,900 for single, $113,400 for married filing jointly). If that number is greater than 0, you owe AMT and must proceed further to calculate the tentative minimum tax (TMT) owed. If TMT is greater than the tax you owe through the regular income tax rules, you must pay that higher TMT.
Second Chances
Another way to look at Alternative Minimum Tax is that it is a “second chance” for being taxed. However, some foresight and planning around those preference items can help keep that “second chance” down to a minimum. Often times, many of those “qualified” for AMT have other concerns, such as running their emerging business. Knowledgeable tax advisors can guide owners through their AMT concerns and business accounting concerns. Looking for an advisor? Look no further than us here at MiklosCPA. We are a California-based accounting firm that supports many emerging businesses with their tax and accounting needs. How can we help you? Let’s chat. Follow our social media pages for future articles and other interesting tax tidbits.
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