What is Alternative Minimum Tax (AMT)? In a nutshell, AMT is a federal income tax imposed in addition to the regular income tax that taxpayers must pay. The purpose of AMT is to ensure that taxpayers with higher incomes are paying their fair share of taxes by preventing them from taking advantage of certain tax deductions and credits.
The AMT was first enacted in 1969 to ensure that high-income earners did not use loopholes or itemized deductions to reduce the income tax they owed. Since its enactment, the AMT has been adjusted to account for inflation and various tax law changes. Each year, the IRS determines the amount of income tax a taxpayer owes through two separate processes: one for their regular income tax and one for their AMT. In order to calculate the AMT, the taxpayer must use a special form that is different from the regular income tax form.
Today, AMT affects more than just high income earners. Due to changes made to the tax code, lower- and middle-income families can find themselves subject to the AMT. This is because those individuals are more likely to take advantage of certain deductions, such as the state and local taxes, or the mortgage interest, and these deductions are not considered when calculating their AMT. In addition, the AMT has been designed to prevent wealthy taxpayers from using certain credits such as the child tax credit and the earned income tax credit.
What Can You Do if You Are Impacted by the AMT?
If you know you are going to be impacted by AMT, there are several steps you can take to minimize its effects. First, you should explore tax credits or deductions that could help reduce your taxes. For example, many businesses are eligible for deductions like research and experimentation tax credits. Additional tax-saving strategies can also be found on the IRS website.
In addition, you can consider taking full advantage of employer-sponsored retirement plans. Contributions to such plans reduce your taxable income, which could help lower your AMT liability. Furthermore, you can consider investing in mutual funds or other long-term investment vehicles, as those investments offer tax-deferred growth. Finally, you should make sure to stay up-to-date on any changes to the tax code and familiarize yourself with the rules and regulations surrounding the AMT.
Conclusion
Alternative Minimum Tax (AMT) was originally put in place to ensure that high-income earners paid their fair share of taxes, but today it impacts both high- and low-income earners. If you find yourself subject to the AMT, you should take advantage of any tax credits or deductions available to you, consider investing in long-term investment vehicles and stay informed about any changes to the tax code.