AMT - What is it and should you care?

Category: Tax Law and Planning

A client came in yesterday and his questions turned to concern about the Alternative Minimum Tax or AMT. My first response - see your accountant. On further thought, I was considering how misunderstood and under-publicized the AMT is and looked for some resources for a better understanding. I found this Guide to the AMT as a sort of AMT for Dummies. It has helpful subtopics like Alternative Minimum Tax 101 and Top 10 Things that Cause AMT Liability.

As to why you should know about and care about the AMT? The fact is that the number of taxpayers that the AMT reaches is growing each year due to the reach of the AMT expanding downward to taxpayers with lower incomes. Many taxpayers who don't owe AMT still need to go through the calculation, at additional time and expense. Also, if you find yourself owing AMT, some traditional tax strategies that work in a non-AMT environment may not benefit you in an AMT environment.

The Guide to the AMT explains the AMT as follows:

"The alternative minimum tax (or AMT) is an extra tax some people have to pay on top of the regular income tax. The original idea behind this tax was to prevent people with very high incomes from using special tax benefits to pay little or no tax. But for various reasons the AMT reaches more people each year, including some people who don't have very high income and some people who don't have lots of special tax benefits. Congress is studying ways to correct this problem, but until it does, almost anyone is a potential target for this tax.

The name comes from the way the tax works. The AMT provides an alternative set of rules for calculating your income tax. In theory these rules determine minimum amount of tax that someone with your income should be required to pay. If you're already paying at least that much because of the 'regular' income tax, you don't have to pay AMT. But if your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax."