If you have to pay the alternative minimum tax, or AMT, you'll be singing the blues instead of the joyous tunes of the holiday season. In today's sixth verse of The 12 Tax Tips of Christmas, we look at just what this dreaded and costly parallel tax is and how you can find out if you might face it.
The AMT is a separately figured tax that eliminates many deductions and credits that filers can claim when computing their regular tax bills. By losing these breaks, they see their tax bill go up under the AMT.
So who has to pay the AMT? The original idea behind this separate tax was to prevent people with very high incomes from using special tax benefits to reduce or eliminate their tax liabilities. Over the years, however, inflation has made income levels once considered wealthy simply a decent middle-class wage.
The problem is that the AMT isn't indexed for inflation. So the law has to be continually tweaked (since Congress won't just kill the damn tax, but that's a rant for another blog post) to keep millions of regular taxpayers out of the AMT's clutches.
The latest legislative moves came via the American Recovery and Reinvestment Act, aka ARRA or the stimulus bill, enacted in February. It included a one-year AMT patch.
The mock tax return your did (or will do) will help you find out whether you escape the AMT this year. Here's a bit more info so that you can clarify your situation.
The stimulus expanded the income exemption levels. You subtract the amount for your filing status when you calculate taxable AMT income.The larger exemptions mean there's less chance of being hit with the AMT.
The 2009 tax year exemptions are:
- $70,950 for married joint-filing couples (up from $69,950 for 2008);
- $46,700 for unmarried individuals (up from $46,200); and
- $35,475 for married individuals who file separately (up from $34,975).
In addition, the ARRA also allows filers to use any and all nonrefundable personal tax credits to reduce a possible AMT bill. This is the same benefit allowed folks facing simply a regular tax bill.
Among the most popular nonrefundable credits are the $1,000 child tax credit and the American Opportunity Education Credit (otherwise known as the modified Hope Credit). Other AMT allowable credits include the credit for the elderly or the disabled and the mortgage interest credit.
You also might want to bookmark the IRS' AMT Assistant Web page.This online tool, which will be updated for the 2009 tax year in a month or so, is designed to help taxpayers who don't use (or haven't yet purchased) tax software determine whether they might be subject to the alternative minimum tax.
Related posts:
- The 12 Tax Tips of Christmas: #1 Sell Assets
- The 12 Tax Tips of Christmas: #2 Improve Your Home
- The 12 Tax Tips of Christmas: #3 Spend Your FSA
- The 12 Tax Tips of Christmas: #4 Be Charitable
- The 12 Tax Tips of Christmas: #5 Do a Mock Return
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