Alternative Minimum Tax

The Basics:

  • The Alternative Minimum Tax (AMT) was designed to catch people who avoid paying taxes due to certain tax breaks, credits and/or deductions.
  • AMT exemption amounts for 2016 are $84,500 for Married Filing Jointly and Qualifying Widow(er), $54,300 for Single or Head of Household, and $42,250 for Married Filing Separately.
  • The only itemized deductions allowed under the AMT are mortgage interest used to buy, build or improve your home, charitable contributions, casualty losses, medical expenses in excess of 10% of adjusted gross income (AGI), and miscellaneous itemized deductions not subject to the 2% of AGI floor.

What is the AMT?

In 1969, Congress created the AMT to ensure wealthy Americans did not avoid paying federal income tax by taking undue advantage of certain “preferential” tax benefits. Unfortunately, the AMT has not been adjusted for inflation over the years, so the AMT starts to affect middle-income tax filers unless Congress increases the AMT exemption. Congress has increased or extended the AMT exemption several times since it was enacted.

Who will be affected?

You’re subject to the AMT if the AMT exceeds your regular tax figured from tax tables and rate schedules. In other words, you pay whichever amount is more, your regular tax or the AMT.

Several factors influence if you’re affected by the AMT, including these common scenarios:

  • You itemized deductions and claimed large deductions for taxes and/or miscellaneous deductions subject to the 2% adjusted gross income limit.
  • You took out a home mortgage or equity line of credit and used the money to do something other than buy, build or improve your home.
  • You exercised incentive stock options and did not dispose of the stock in 2016.
  • You claimed a large number of personal and dependent exemptions on your return.

AMT exemptions (the amount you can deduct from your AMT income) for 2016 year were:

  • Married Filing Jointly and Qualifying Widow(er): $84,500
  • Single and Head of Household: $54,300
  • Married Filing Separately: $42,250

Phase-out rules for the AMT exemption did not change. The phase-out range is based upon alternative minimum taxable income (AMTI). The AMTI phase-out begins at the follow income levels for 2015:

  • Married Filing Jointly and Qualifying Widow(er): $160,900
  • Single and Head of Household: $120,700
  • Married Filing Separately: $80,450

Deductions and the AMT

A report from Congress shows the AMT has a disproportionate impact on residents living in certain states. It also revealed that taxpayers itemizing deductions for state and local taxes and/or miscellaneous deductions, as well as those who have larger families, are at greater risk than those who don’t. And married taxpayers across a wide income range will be affected, whether they itemize or not.

Keep in mind that personal exemptions, itemized deductions for state and local taxes (other than the deduction for sales and excise taxes on qualified motor vehicle purchases after Feb. 16, 2009), and miscellaneous itemized deductions, all of which serve to reduce regular taxable income, are not deductible under the AMT. The only itemized deductions allowed under the AMT are mortgage interest used to buy, build or improve your home, charitable contributions, casualty losses, medical expenses in excess of 10% of AGI, and miscellaneous itemized deductions not subject to the 2% of AGI floor. As a result, taxpayers in certain income ranges, those who itemize and those with larger families may be hit hardest by the AMT.

New Jersey, New York, Connecticut, the District of Columbia and California have a higher percentage of taxpayers subject to the AMT. These states have many taxpayers with large incomes who pay their state’s high state and local taxes. Although these taxes are deductible for regular income tax purposes, they aren’t for AMT purposes, increasing the likelihood of paying AMT.

However, taxpayers in states with relatively low tax rates or those that don’t have a state income tax are less likely to pay AMT. States with the smallest percentage of taxpayers subject to the AMT are Tennessee, South Dakota, Alaska, Alabama and Mississippi.