What Is the AMT? The Alternative Minimum Tax, Explained

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The AMT is not the same thing as an ATM, but read it quickly, and you’re likely to mistake it for the machine that spits out cash.

The alternative minimum tax, however, tends to take money away from you.

If you’ve ever been hit by the AMT, you’re likely craving a more serious explanation, so here’s a short history of what this tax is, who it affects and what you can do to potentially sidestep it.

How the AMT Came to Be

The AMT is an “alternative” tax that is calculated at the same time as regular income taxes, and you, as a taxpayer, are typically asked to pay whichever is greater. If the AMT applies to you, you may lose many credits or deductions you would normally receive if you didn’t have to pay the AMT.

The concept of an alternative minimum tax didn’t always exist: According to the I.R.S., It was created in 1969 to keep the wealthiest taxpayers (and corporations) from using loopholes or big deductions to avoid paying a minimum amount of taxes. However, the tax has never been indexed to inflation, so as wages increased, it has started to affect more middle class Americans than ever before.

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In 1970, less than 20,000 people paid the AMT; In 2012, a huge number of Americans—about 4 million—were projected to be hit by it. The majority of those paying the tax, originally intended to target the “one percent,” make between $150,000 and $200,000. In fact, in 2011, just over 53% of households with annual earnings of $200,000 to $500,000 paid the AMT, while only 33.5% of those making an annual income of $1,000,000 did, according to the Tax Policy Center.

In 2013, Congress passed a permanent patch to index future exemption levels to keep pace with inflation, which will, hopefully, mean that fewer people will be exposed to this tax in the future.

How is the AMT administered—and who is likely to pay it?

“It’s very difficult to tell if you’ll have to pay AMT by income alone because there are so many factors that go into determining this calculation,” says Shana Bickel, a certified public accountant based in Sarasota, Fla. There are a few things to watch out for that can trigger AMT—some you can control and some you can’t, she says. The best way to see if you are close to paying the AMT is to look at Form 6251 from last year’s tax form.

The people who are most likely to pay the AMT have incomes over $100,000 and very large deductions. Below you will find a list of situations that could leave you vulnerable to owing the AMT. If you fall into one of these categories, and your income is above $100,000, you may want to talk to your CPA or tax accountant to see if there is any tax planning you can do to potentially avoid it.

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High City, State, and Property Taxes

You are more likely to pay the AMT if you live in a state with high local, state, or property taxes such as: New York, New Jersey, California, and Connecticut.

High Medical Expenses

If you’ve had major medical bills this year and are able to deduct the majority of them, this could actually expose you to the AMT since your itemized deductions are higher.

You Have a Big Family

If you have lots of children, you may also qualify for other credits like the dependent care tax credit and the American Opportunity Credit for college-age children. Tax credits are normally a good thing because they lower your traditional tax bill, but the downside is that you could find yourself having to pay the AMT. The more tax credits you have, the more likely you are to pay the AMT.

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