Why You Could Get Hit With the AMT

Anna Williams
Posted

If you know what the AMT is, you’re probably not too fond of it.

The AMT, or the Alternative Minimum Tax, can be one of the most dreaded words in the taxpayers’ alphabet soup.

Simply put, it is a way to make sure that high-income Americans with a lot of potential write-offs and tax shelters still pay a minimum amount of taxes. The AMT is calculated at the same time as regular income taxes, and you’re usually asked to pay whichever number is greater.

Though it’s generally based on a combination of your income level, your potential deductions, and the sources of your income, the difficulty lies in knowing if you’re actually susceptible to it.

“I love to describe the AMT as one of those big roulette-type wheels that goes round and round, and where it stops nobody knows,” Pete Lang, president of Lang Capital LLC, a private wealth manager, told CNBC.

In the past, the AMT was never indexed to inflation. That meant that as wages increased, more middle class Americans were affected by it—even though it was originally intended to target wealthier taxpayers.

The good news is that newly enacted tax law changes may offer some relief from the AMT. Going forward, the AMT will always be tied to inflation, and income thresholds for avoiding the tax will also be higher: For the 2013 tax year, the exemption is up to $80,800 for married couples who file together and $51,900 for single taxpayers.

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This means that in the future, those in the upper-middle class are most likely to face the tax. Still, about 3.9 million taxpayers are predicted to get hit with the AMT for 2013, according to the Tax Policy Center.

Here are some factors that could increase your chances of having to pay the AMT, according to CNBC:

1. If you live where there are high state and local taxes (these produce big deductions on the regular return)
2. If you exercise stock options
3. If you report large investment options
4. If you have lots of children
5. If you use a home-equity loan for something other than home improvement
6. If you have a lot of miscellaneous deductions
7. If you claim business depreciation

To help gauge whether you might owe the AMT, try this tool from the IRS. An accountant or other expert can also help you devise strategies for avoiding it in the future.