Alternative Minimum Tax

The overly complicated tax code of the Internal Revenue Service has just as many deductions to even out over zealous taxation as it does exceptions to keep people from exploiting them.

One such complicated exception is the alternative minimum tax. The alternative minimum tax is a parallel tax system with different treatment for deductions and income. The purpose of the AMT is to prevent taxpayers from avoiding tax by using the deductions allowed for regular tax.

The governing rules for calculating the alternative minimum tax are different from those rules used to calculate regular income tax. For people who qualify, both tax amounts must be calculated and the higher of the two taxes paid. The IRS provides a worksheet to help the taxpayer determine if they qualify for payment of the alternative minimum tax. By completing form 6251, a taxpayer may determine if and how much in AMT they owe.

Where this gets tricky and unfair, is when taxpayers have life circumstances that generate ordinary tax deductions that appear extraordinary for AMT purposes. Deductions for a large number of dependents, large miscellaneous and medical expenses or for paying high state or local taxes can cause taxpayers to experience an AMT situation.

The tax that was originally designed to keep the top wage earners from avoiding taxes is now affecting millions of middle class taxpayers and will eclipse the regular tax revenues if nothing is changed.

Since the alternative minimum tax can increase taxes substantially, a professional tax advisor who is experienced in income tax and AMT planning is a welcomed addition to your professional team. A CPA should prepare an evaluation to determine a route to help reduce your overall income taxes, both regular and AMT.

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