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Why You Might Owe an AMT Surcharge

March 26, 2015
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Introduced in the late 1960s after a very small number of high-earning Americans managed to avoid paying any taxes, the Alternative Minimum Tax occupies a controversial space in today’s tax landscape. Here’s a look at why AMT is affecting millions of taxpayers who were never meant to get hit by it.

How it works

During tax season, millions of Americans turn to a host of benefits and deductions to try to reduce their taxable income. Issues can arise when especially wealthy taxpayers use those benefits and deductions to shelter massive sums of cash to avoid taxes.

The AMT law aims to cut down on abuse by setting a limit on those benefits. If the credits and deductions you claim reduce your tax obligation to a level that’s below what you would pay using AMT guidelines, you owe the higher AMT amount. The increase can be substantial.

Taxpayers who fill out their own Form 1040 returns without the benefit of tax-preparation software are encouraged to calculate their taxes first, then look to see whether they must pay a higher AMT amount by using Form 6251. The IRS offers a guide to help taxpayers find out whether they’re subject to an AMT surcharge.

Additional background

In 1966, it was discovered that 155 Americans who all earned over $200,000 annually — equivalent to almost $1.5 million today, adjusting for inflation — hadn’t paid a single cent in taxes because of certain loopholes and shelter strategies. To prevent that from happening again, AMT became law in 1969. However, it didn’t account for inflation, so as incomes rose to keep pace with inflation over decades, more and more Americans have been subject to the AMT.

Congress passed a law in 2014 that mandated adjusting AMT automatically each year to account for inflation. But the change didn’t completely fix the problem. Some tax experts say if your income passes $150,000 you should check to make sure you don’t owe an AMT surcharge, and that people with incomes as low as $75,000 can be caught up by the law.

Will I be affected?

Certain scenarios may make you susceptible to the AMT. Generally speaking, the more tax credits and deductions you take, the more likely you are to be hit with an AMT surcharge, even if the benefits you claim are completely legitimate.

For example, if you had to undergo major surgery that resulted in hefty medical bills that you deducted from your income, you might have to pay an AMT surcharge since your itemized deductions will be high. Or, if you take a dependent-care tax credit along with higher education tax benefits, you might also have an AMT charge. If that’s the case, consider talking to a tax consultant to determine your best course of action.

Although the AMT law has caused quite a bit of grief over the years, it’s possible to minimize its effects. The main thing for taxpayers is to be aware of it and taking appropriate steps ahead of time if you think you might be affected by it.