Have you noticed that it seems people with higher than average incomes pay less tax than those who are barely scraping by? Well, Congress have noticed it, too. The alternative minimum tax, or AMT, came about as a way of leveling the playing field. This is an explanation of how it all breaks down for the taxpayer.
The alternative minimum tax is an extra tax. Some people are required to pay this on top of their regular income. The guidelines for figuring this tax are different than those used for the standard IRS calculation. To determine if you have to pay this tax, compare your taxable income through the AMT calculations and the standard way.
The calculation to determine the alternative minimum tax is complex, but don’t worry about that. Most tax preparation software can calculate the amount of taxable income using the AMT guidelines for you, so it is easy to compare side by side with your normal taxable income. If the amount of taxable income is lower with the standard calculation than with the AMT calculation, you don’t have to pay any extra taxes. If the situation is the other way around, you will more than likely owe the government some money.
I can see that some people are already confused. To make it easier, here’s an example. The amount of your taxable income is $40,000. When the amount of taxable income is calculated using the AMT guidelines, the amount is $30,000. What this means is that according to the AMT guidelines you are going to be paying taxes based on a higher amount with the IRS calculation. So there is no need to pay additional taxes.
On the other hand, let’s look at a reverse situation. The amount of taxable income is $30,000 according to the standard calculation. When the AMT guidelines are applied, the taxable income amount is $38,000. Since AMT assesses your income at a higher amount than the standard, you may not be paying enough taxes. So, you will have to pay taxes on the standard amount and the extra $8,000.
The system is designed to help out the little guy, but it is not perfect. There are some kinks and anyone can be subject to the alternative minimum tax. The alternative minimum tax calculations don’t allow for most of the deductions you are entitled to under the standard IRS calculation.
Unfortunately, for people with lots of itemized medical deductions and a high standard deduction, this could be a problem. The government has instituted an alternative minimum tax exemption to fix this problem, but it is not a cure-all. Taxpayers can calculate their taxes with and without itemization and compare the figures to AMT calculations to avoid any potential problems down the road.
The alternative minimum tax is not a concern for most people who make a medium salary. It is targeted at those with very large incomes who use tax shelters and other devices to pay less in taxes than the ordinary working man. Tax software can compute the AMT for you so put your mind at ease.
