The Alternative Minimum Tax: What It Is and Why You Don’t Want It

Alden Wicker
Posted

Hey there, this story refers to the 2011 tax year. For the most up-to-date information covering the 2012 tax year, check out Will You Get Hit With the Dreaded Alternative Minimum Tax?

The alternative minimum tax ranks up there with eating a bad clam or having a cavity drilled—it’s something unpleasant that you really want to avoid if possible.

The AMT, which is a minimum amount of taxes you have to pay, was created in 1969 as a way to make sure that very wealthy people with access to a lot of write-offs and tax shelters would pay their fair share of taxes.

Alternative Minimum Tax

But this tax isn’t indexed for inflation the way many parts of the tax code are. As a result, people we wouldn’t necessarily consider wealthy now fall under it. Middle and upper-middle class taxpayers with large write-offs—a big mortgage, heavy local taxes or several children, for example—can find themselves paying the tax, which works by taking away deductions and adding back in items that are usually tax-free, for a higher tax bill overall.

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Congress has been “patching” the AMT for the past few years by passing temporary increases to the income thresholds where it kicks in. But it’s still an annual booby trap for a growing number of middle-class taxpayers. The general rule of thumb is that if you have a large amount of itemized deductions, you should have your accountant calculate the AMT for you.

To find out for yourself if you fall under it, use this tool from the IRS. If you find out you have to pay the AMT, it’s pretty difficult to avoid. An accountant might be able to help you come up with strategies for steering clear of it and can look for ways to minimize your tax burden this year. She can also help you create a strategy for avoiding the AMT next year, if possible.

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