Who Has to Pay the Alternative Minimum Tax?

The Alternative Minimum Tax is a mandatory alternative to the standard income tax. Triggered when taxpayers do more than exempt and use many common itemized deductions. The exemption is $ 113,400 for joint taxpayers and $ 72,900 for individuals.

The reason the AMT captures those in the higher tax brackets is that it eliminates many of these deductions. It reaches 60% of taxpayers who earn between $ 200,000 and $ 500,000.

That's the boring part of AMT. If you earn more than the AMT exemption amount and claim large deductions, you will have to calculate your taxes twice.

The first time is for regular income tax and the second is for AMT. To make matters worse, you must pay the highest tax.

In 2017, the Tax Reduction and Employment Law maintained the AMT, but increased the exemption and elimination levels for fiscal years 2018-2025. Includes an automatic cost-of-living adjustment. Congress eliminated the AMT for businesses.

The AMT produces about $ 60 billion a year in federal taxes from 1% of taxpayers.

How does AMT work?

The AMT is different from the regular tax rate in that it has no standard deduction or personal exemption. It also doesn't allow the most popular itemized deductions.

This includes state and local income taxes, foreign tax credits, and employee business expenses.

The AMT does not allow interest on home equity mortgages unless the loan was used to improve your home. Real estate and personal property taxes are not deductible.

Medical expenses are only deductible if they exceed 7.5% of your adjusted gross income for tax year 2018.

You must also record whether you need the qualifying electric vehicle credit (form 8834) or the prior year minimum tax credit (form 8801).

The AMT may also include other sources of income not accounted for by regular income tax. For this reason, the AMT is higher than the normal tax.

These other sources of income include:

The fair market value of incentive share options that were exercised but not sold.
Otherwise, tax-free interest on private activity bonds.
Foreign tax credits
Passive income and losses
Deductions for net operating losses
Fortunately, the AMT tax rate is simpler than regular tax rates. There are only two tax rates: 26% and 28% .3 The tax rate is 26% on income below the AMT limit and 28% above it.

For tax year 2020, the limit is $ 197,900 AMT of taxable income for single filers and married filers filing together. It's $ 98,950 for couples entering separately. For comparison purposes, for fiscal year 2017, the limit was $ 187,800 AMTI or $ 97,400 for married couples shown separately.

The AMT exemption is much larger than the standard exemption, but it begins to disappear once you reach a certain level of income, which is called a "phase-out."

When your income reaches the elimination level, 25 cents of the exemption disappears for every dollar over the elimination.

For 2020, the elimination is $ 518,400 in AMTI for single registrars and $ 1,036,800 for married filers filing joint actions. The exemption will return to pre-tax levels in 2026.

Who has to pay the AMT?

You only need to worry about the AMT if your adjusted gross income exceeds the exemption. If you have the same or more income, this is the AMT taxable income.

You may need to figure your alternate minimum taxable income and pay the higher tax. You can do it on Form 6251.5. Your tax software package will do it for you.

Once you qualify for AMT in one fiscal year, you must pay it off, but you can adjust your expenses to lower AMT in the following year. There are four common methods:

Make sure the state tax withholding does not exceed the expected payment. State tax payments are not deductible under the AMT.

Pay your property taxes only when they are due. Don't prepay your next installment until the end of the year.

Sell ​​options on incentive shares exercised in the same year in which they are exercised. If you exercise the options but do not sell, the value of the exercised options becomes income for AMT purposes.

AMT does not affect everyone who exceeds the qualifying income limits. Before the new tax law, it had the biggest impact on families making between $ 500,000 and $ 1 million a year. But even in this range, only 61.9% paid the AMT.

Married taxpayers with children are more likely to be arrested by the AMT for a variety of reasons. First, they tend to have higher incomes, especially if both parents work. Second, the AMT does not have additional exemptions for each family member. Third, there are no "marriage bonuses" in the AMT.

We hope you enjoy watching this video about Alternative Minimum Tax

Source: Money and Life TV


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