Could the AMT Boost Your Taxes?
After years of Congress enacting temporary “patches,” the American Taxpayer Relief Act of 2012 permanently indexed the exemption level of the alternative minimum tax (AMT) to inflation. Although this change limited future expansion of the tax, the AMT is still expected to affect about 4.3 million taxpayers in 2016 (see chart).
The AMT is a parallel tax system that eliminates many of the deductions, exemptions, and credits used by taxpayers to reduce their tax bills. Taxpayers with incomes above the indexed exemption amounts ($53,900 for single filers and $83,800 for married joint filers in 2016) must calculate their income taxes under both sets of rules and pay the higher of the two.
AMT rates are 26% or 28%, compared with federal income tax rates that range from 10% to 39.6%. Thus, taxpayers in the highest bracket — the original target of the AMT — may not be affected because they pay taxes at a higher rate under the regular tax system. Instead, the AMT typically affects taxpayers of more moderate income levels.
The more exemptions and deductions that you normally claim, the more vulnerable you may be to the AMT. Here are some common situations that may trigger AMT liability:
- Married couples who claim multiple exemptions for dependent children
- High deductions for state and local taxes or medical expenses
- Interest on a home-equity loan or second mortgage that is not used to buy, build, or improve a home
- Incentive stock options exercised during the year
- A large capital gain
- Net operating losses, or passive income or losses
- Income from private-activity bonds
Looking ahead may help you avoid or mitigate the effect of the AMT. For example, you may be able to delay an asset sale or spread out the gain by structuring payments in installments. You could exercise incentive stock options strategically or choose to take certain itemized deductions in years when you won’t face the AMT.
Like many aspects of the U.S. tax code, the AMT is complex, so be sure to consult your tax professional before taking any specific action.