Why do I have to pay Alternative Minimum Tax?

As a good steward of your money you are trying to do some tax planning and coordinate some of your tax deductions but when you actually go and compute your income taxes you find that you end up paying more than you planned because of alternative minimum tax.

Upon further investigation, you realize that there is nothing alternative and nothing minimum about this additional tax burden that you are being subjected to.

The alternative minimum tax (AMT) applies to taxpayers with higher income by setting a limit on the tax benefits derived from certain deductions. The goal of AMT is to help ensure that higher income taxpayers at least pay a minimum amount of tax.

The AMT is effectively an additional income tax imposed by the government above and beyond the regular tax. Therefore, the AMT is owed only if the tentative minimum tax is greater than the regular tax.

AMT can apply to individuals, corporations, estates and trusts.

The AMT is figured separately from the regular tax. Generally speaking, the method to compute the minimum tax involves computing the taxable income by eliminating or reducing certain tax exclusions and deductions as well as taking into account certain timing differences that the tax code allows for under the regular tax computation method.

Adjustments for an individual income tax AMT calculation include:

• Miscellaneous itemized deductions are not allowed. These include all items subject to the 2 percent floor such as employee business expenses, job search expenses and tax preparation fees.

• The home mortgage interest deduction is limited.

• No deduction is allowed for personal exemptions under the AMT computation.

The AMT is essentially a parallel tax system in which a taxpayer is responsible for paying the higher of the regular tax or the minimum tax. If your income is above the AMT threshold then your tax preparer or the tax software that you use effectively computes your income taxes under the regular tax rules and the AMT tax rules and whichever ends up being higher is what you end up paying to the IRS.

The exemption levels that AMT will apply to for 2016 presently are $53,900 for single and head of household filers, $83,800 for married filing joint returns, and $41,900 for married filing separate returns.

So it is clear that AMT is no longer a tax just on the wealthy but is impacting the middle class as well.

As residents of Ohio we are more likely to be subject to AMT than residents in some other states due to the fact that we have both state and local taxes. In other words, even though we are told items such as state and local taxes or mortgage real estate are tax deductible expenses, if you currently have more than $41,900 of income you may not be able to effectively deduct these otherwise deductible expenses due to AMT.

In addition to the loss of deductions from AMT a taxpayer can also lose many of the incentive tax credits due to AMT. I have had clients purchase alternative fuel vehicles due to the lucrative tax credits available that the dealership pointed out, only to not be able to utilize the credits due to AMT.

Congress has made it difficult to get around alternative minimum tax. Extensive tax planning is necessary to reduce or avoid this tax, and even with extensive tax planning it may be ultimately be unavoidable.

A good strategy to minimize your AMT exposure is to keep your adjusted gross income as low as possible or to keep your itemized deductions that are subject to AMT at a minimum.

Paul Pahoresky is a partner in the accounting firm of JLP CPAs. He can be reached at 440974-1040x14 or at paul@ jlpcpas.com. Consult your tax advisor for your specific situation for additional information and guidance on these topics.

Paul Pahoresky