You may have no idea what the so-called alternative minimum tax (AMT) is, let alone know why so many people are talking about it this tax season.
Most people aren't affected by the AMT - hence the lack of awareness. An estimated 2.1 million taxpayers were affected in 2001, but that number is expected to rise to 30 million-plus in 2010.
For now though, the number of people subject to the AMT is holding steady or may even decrease, due to tax law changes taking effect.
What is the AMT anyway?
Think of it as a "catch-you" tax. It's aimed at people who might be getting out of paying their "fair share" of taxes by using certain tax breaks. Under AMT rules, certain deductions allowed when you compute your "regular" tax are not allowed, some items of income and deduction are computed differently, and a different rate schedule applies. You are subject to the AMT if it exceeds your regular tax, figured from tax tables and rate schedules. In other words, you pay whichever amount is higher, your regular tax or the AMT.
Who will be affected?
Several different factors will influence whether you're affected by the tax, including these more common scenarios:
- You itemize deductions and claim large deductions for taxes and/or miscellaneous deductions subject to the two percent adjusted gross income limit.
- You take out a home mortgage or equity line of credit and use 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 2004.
- You claimed a large number of personal and dependent exemptions on your return.
But you don't have to guess whether you'll be affected or not. To find out for sure, use our AMT Estimator.
A full set of instructions for the AMT can be found on Form 6251.
What's New for 2005?
Because the regular tax rates were decreased, more taxpayers would have been subject to the AMT. But Congress also increased the AMT exemptions as follows:
- Singles and heads of household, from $35,750 to $40,250;
- Married taxpayers filing jointly and qualifying widow(er)s, from $49,000 to $58,000;
- Married taxpayers filing separately, from $24,500 to $29,000.
The higher amounts were enacted to counteract the effect of the rate cuts. The increased amounts will remain in effect through 2004.
For more information about how the AMT affects your tax situation, talk to your tax professional.
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