Your Money: AMT: The Ticking Time Bomb |

Your Money: AMT: The Ticking Time Bomb

by Michele Knight

In my opinion, the Alternative Minimum Tax (AMT) is the biggest threat to a taxpayer’s bottom line, far more so than adjusting tax brackets or disallowing deductions. At the 30,000 foot level, the AMT is a tax added to wealthy individuals. In order to understand the AMT, you need to look back at its history, and understand where it came from and how it’s affecting taxpayers more now than ever.The AMT is actually a separate tax system, originally developed to force the wealthy to pay their share of taxes, many of whom previously paid less tax as a percentage than lower- and middle-class folks because they hired lawyers and CPAs to help them take advantage of more deductions. While I don’t claim to know its entire history, I would paraphrase it this way: The AMT was developed for families like the Rockefellers and Carnegies. The industry barons made so much more income than the average US family that the IRS came up with a second level of taxes so they could collect taxes from the wealthy families regardless of how many deductions they came up with.In simple terms, calculating the AMT requires you to first prepare your normal 1040 as usual, then fill out Form 6251, on which you add back specific itemized deductions, including investment expenses, employee business expenses, medical/dental expenses, and state and local taxes. Your new taxable income is then calculated based on AMT rules, and if it’s higher than your previous taxable income, you must pay the higher tax. It sounds simple, but it is an easy step to overlook in tax preparation, especially as it continues to affect more and more people each year.If you’ve never heard of the AMT, you’re probably wondering why it matters? After all, your family is middle class, not uber-wealthy like the Rockefellers. Here’s the catch. When the AMT was set into motion, uber-wealthy families made $150,000 or so. Every year since then, that income threshold has been raised each year by a few thousand dollars. But, effective 2012 it reverts back to $150,000, and millions upon millions of families will be affected. For a family making $150,000, their taxes may go up a few thousand dollars. For a family making $400,000-$500,000, that increase could be tens of thousands. This is not the first year Congress needed a fix to avoid a substantial number of people being subject to the AMT, but this year there is far more political pressure to avoid the appearance of giving any tax breaks to the wealthy. I also speculate that politicians may see this as an easy way to raise revenue. Since the AMT limits automatically drop this year, there would be no vote needed, and Congress could passively let it happen so no one would get their hands dirty.In the past, Congress has compromised towards the end of the year and prevented the limits from falling back to original levels, but there is no guarantee that will happen this year. What does this mean for you? If you are making $150,000 or more, you should run your figures through a tax planning software to see what the potential liability would be, or at least plan for the worst at tax time and hope Congress acts before year end to bring us all a pleasant surprise.Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. For more info and to contact her, visit

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