What is Alternative Minimum Tax & Why Are We Paying It?
Trusts & Estate Planning
by Kira S. Masteller
818.907.3244
In 1969, Congress created the Alternative Minimum Tax (AMT) to ensure that anyone who benefits from certain tax advantages pays at least a minimum amount of tax. The AMT was intended to be a flat tax for the wealthy.
Unfortunately, Congress seems to have missed those that they targeted and aimed instead at many unintended taxpayers who now have to deal with a very complex set of rules that few, even in the tax community, fully understand.
What Does AMT Do?
The AMT provides an alternative set of rules for calculating a minimum tax for the so called wealthy.
In general, the AMT determines a minimum amount of tax that should be required for those taxpayers deemed wealthy; that have a number of defined tax preferences, or loopholes (as some call those deductions that were originally intended to stimulate the economy, that others may not be able to utilize); resulting in specifically politically stratified oriented taxation or penalty for those that invest in America.
Should the regular income tax fall below this minimum there is a complex recalculation based upon disallowing those “loopholes.” Some of these include:
-
- Home Mortgage Interest,
- Charitable Donations,
- Investment Expenses,
- Passive Income or Losses,
- Home Mortgage Interest,
and numerous other “socially unacceptable” deductions resulting in an Alternative Minimum Tax.
Tax laws provide specific tax benefits for certain kinds of income and allow special deductions and credits for certain expenses sometimes resulting in no or little tax if a taxpayer utilized those advantages by investing in the American economy.
Congress has never truly adjusted the AMT for inflation, and because of this, .a growing number of middle-income taxpayers are discovering they are being ensnared by the AMT system.
The AMT exemption amounts allowed as total deductions in lieu of your total itemized deductions, are set by Congress for each filing status.
If your total itemized deductions are in excess of the amounts listed below, you lose all of any exemptions above these amounts set by your favorite group in Washington..
For tax year 2011, Congress raised the AMT exemption amounts to the following levels:
- $74,450 for a married couple filing a joint return and qualifying widows and widowers;
- $48,450 for singles and heads of household;
- $37,225 for a married person filing separately.
The minimum AMT exemption amount for a child whose unearned income is taxed at the parents’ tax rate has increased to $6,800 for 2011.
These amounts are in addition to the other complex rules that relate to the percentage loss of medical deductions, what is termed as excess mortgage interest deductions, and the limitations on business expenses. Yes, it’s complex.
Kira S. Masteller is a Trust and Estate Planning Attorney who works with individuals and their businesses to maximize savings and profits. You may reach her by calling 818.990.2120.