The alternative minimum tax (AMT), a parallel tax category created by Congress to operate alongside the traditional federal income tax, went into effect in 1969. It was designed to ensure that all Americans would pay their fair share of taxes – particularly high-income individuals with numerous tax deductions.
Unfortunately, because it was not indexed for inflation, the AMT started to affect taxpayers it was never intended to target, specifically middle-class households.
The AMT calls for certain taxpayers to calculate their tax liability two times – first under the regulations laid out for regular income taxes and then a second time to comply with AMT rules and mandates. The AMT expands the amount of income that can be taxed by the federal government.
It does so by recalculating an individual’s income tax after adding certain deductions into the taxpayer’s adjusted gross income. The deductions are included the taxpayer’s annual income to figure out that individual’s alternative minimum taxable income. After that, the AMT exemption is subtracted to reach the individual’s tax obligations to Uncle Sam.
Primarily, the alternative minimum tax impacts higher-income Americans who have between $200,000 to $1 million in annual income. Still, U.S. taxpayers who earn as little as $75,000 can be ensnared in the AMT, based on IRS qualification rules.
Focus on IRS Form 6251
Taxpayers wondering if they’re subject to the AMT need to complete IRS Form 6251.
If the calculated tax on IRS Form 6251 exceeds the tax obligation listed on the regular IRS tax form, you’ll need to pay the difference, as well as paying any tax owed based on your regular IRS tax form. The taxes owed can really add up, as the AMT requires taxpayers to include tax-saving items back into their income, including:
- The individual’s standard deduction.
- The deduction for state and local taxes.
- Any personal exemptions.
- Home equity mortgage interest.
- Employee business expenses and other miscellaneous deductions.
- Medical expenses.