The Alternative Minimum Tax: Taxing Those Who Found Too Many Loopholes
Written by Kristina Lee   


The Alternative Minimum Tax is a federal tax targeted at high-income individuals who qualify for so many tax breaks and benefits that they pay little or no taxes. The Tax Reform Act of 1969, effective in 1970, created this tax, setting a standard for a minimum tax that people have to pay. Each year, taxpayers calculate their regular tax amount (calculated the standard way, as referred to in the other Mortgage Tax Deduction articles), as well as their Alternative Minimum Tax (AMT). Taxpayers are required to pay the larger of the two. Initially, only high-income individuals were affected, but due to a lack of indexing the AMT exemption amount to the inflation rate, in recent years the AMT has been affecting middle-income individuals as well.

The AMT works by disallowing many of the deductions that are allowed through the regular tax liability, and compensating for that by granting a larger exemption amount. Thus, taxpayers who have a great number of “tax preference items” are more likely to be affected. Here are a few of the items that may lead to AMT liability, as these deductions are not allowed under AMT.

Incentive Stock Options: These must be reported as income unless sold within the same year.

Interest on Second Mortgages: While the regular tax allows mortgage interest deductions regardless of purpose, the AMT does not. Interest on home equity mortgages that were not used to buy, build, or improve your home are not AMT deductible.

Long Term Capital Gains: Large capital gains can reduce or eliminate the AMT exemption amount.

Medical Expenses: A more limited deduction is allowed.

Miscellaneous Itemized Deductions: Unreimbursed employee expenses, investment expenses, and tax preparation fees are not deductible.

Personal Exemptions: Those claimed for yourself, your spouse, dependents, etc are not allowed.

Standard Deduction: Though most AMT affected individuals itemize, the standard deduction is still not allowed.

State and Local Taxes – Including property taxes, income taxes, and sales taxes.

Tax-Exempt Interest: Some interest may be exempt from the regular income tax but not from the AMT, such as certain bonds, or mutual funds that invest in them.

Tax Shelters: They are mostly disallowed, but there are exceptions.

Various Credits: Most are not allowed, although Congress has authorized relief for some “personal credits.”

So, as you contemplate buying a home or taking out a mortgage of some sort, evaluate your current tax liability and your risk for being AMT liable. Important factors to remember are that property taxes are disallowed, as are home equity loans taken out to finance activities or purchases other than buying, building, or improving a home.



 
Last Updated on Wednesday, 22 December 2010 05:07