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Little Surprises the Alternative Minimum Tax (AMT) Can Pull on You

When the Alternative Minimum Tax (AMT) was introduced by Congress, their heart was in the right place. This alternate tax was intended to stop the ultra-rich from exploiting every tax loophole in the system and taking advantage of every deduction on the books to reduce their tax bill to zero, or indeed often to below zero, meaning the super wealthy were getting tax refunds at the end of the year. However, because of flukes in AMT laws, the super rich are no longer the only people getting socked by the AMT. Every year, more and more families are being required to lose some of their deductions and pay more taxes than ever before.

To understand the AMT, experts recommend that you think of it as something you pay in addition to regular taxes. You cannot understand AMT law in the framework of traditional income tax laws, and you cannot determine if you are subject to taxation under AMT without doing your regular tax returns. To get started figuring out if AMT is going to get you, it helps to understand why so many more people are falling prey to it every year. While regular income tax brackets and rates are adjusted for rising inflation every year, AMT rates are not. AMT tax brackets are based on figures of wealth that are more than 30 years old. That helps explain why AMT affected only 19,000 people when it was instituted and affects millions of families now. That 2006 upper middle class salary would have made you seriously well off in the 1970s, and since the rates have not been adjusted, you are now considered to be in the financial upper crust.

If that news has made you say, "uh-oh," then it may be time to run the figures and see if you fall into the AMT tax bracket. There is only one way to do this; fill out your regular 1040 forms, and then get a Form 6251, the AMT form, from the IRS. You will need the information from the 1040 to fill out your 6251. The 6251 form is going to ask you to count as income all sorts of things the 1040 doesn't; like home equity loans that were not used for home improvements and the money you have made on every single stock transaction (not transactions over a set amount, like regular tax). You will need to add back nearly all of the deductions you took on the 1040, like your personalized deductions, any deductions under the Energy Credit Act, your mortgage interest payments, and many of your business related expenses. Your income, plus all of those deductions from the 1040, equals your AMT taxable income. While each case is different, a general rule of thumb says that if that amount is over $75,000, then you owe AMT tax.

The AMT is notoriously complicated, and gets even more so if you own your own business, are a shareowner in a business, or own several real estate properties. Experts recommend you get a financial advisor or tax expert on board to help you navigate the AMT system. A little more bad news - if you are found to have been eligible for AMT in the past, but haven't paid it, the IRS will slap you with a back tax bill, plus a fine, for however many years you have avoided the tax. All is not lost, however. Keep your old 6251 forms because you may be eligible to reclaim some of your AMT tax on future 1040 forms, especially if income from stocks is what put you over the edge. Again, consult a financial advisor to see how this affects you.