Alternative Minimum Tax impacted by new law

The recent passage of the American Taxpayer Relief Act of 2012 by the federal government made Alternative Minimum Tax exemption amounts permanent.

Changes were made to the Alternative Minimum Tax (AMT) to permanently index it to inflation. In the past several years, the federal government passed legislation each year to raise the exemption from the original amount. Without this change, many more taxpayers would be paying AMT.

The Alternative Minimum Tax is a separate way to figure federal income taxes. It is designed to keep higher income taxpayers from using certain deductions from paying very little or no taxes.

AMT is a somewhat complicated calculation. Essentially, there are two tax calculations that should be done on each tax return. There is the calculation for regular federal income tax. Then there is a calculation for alternative minimum tax. The taxpayer is required to pay the higher of the two calculations. Different regulations are used for AMT.

There are special adjustments that are involved in the calculation of AMT. Some items that were deductions in figuring regular tax are added back into the calculation for AMT. Some examples include: state income taxes, property taxes, personal and dependent exemption deductions. Also the amount of depreciation taken on capital items that is in excess of what would be claimed using straight-line deprecation would be added back in.

Farmers who pay two years of property taxes on their principal residence to maximize the use of the standard deduction the following year may trigger an AMT liability that reduces the tax benefit.

Other items that are treated differently in AMT include: hobby farm activity deductions, tax free interest, employee business expenses, certain kinds of home mortgage interest expenses, and medical and dental expense deductions.

If you have large amounts of capital gains income, it could trigger AMT. In some cases, if you spread the capital gains over more than one year AMT may be avoided.

So if you have high income, large numbers of dependents, considerable capital gains and/or large miscellaneous itemized deductions you may have to pay Alternative Minimum Tax.

It is a very good idea in working with your tax advisor to have them always check for Alternative Minimum Tax.