Well we’ve already learned about the dreaded Alternative Minimum Tax. If you missed it, read about this tax and how it works here. Basically it’s a tax devised to prevent rich people from using too many loopholes to avoid paying income taxes. The rich can loophole all they want, but the Alternative Minimum Tax (AMT) throws them back into the taxpaying system by levying a tax on them anyway, despite all the fancy deductions and exemptions their accountant may have come up with!
The AMT basically asks certain high-income taxpayers to re-calculate their income tax under this alternative system. If they end up owing more under the AMT, then that’s what they pay. In essence, what the AMT is doing is stripping away those nice deductions so the rich pay taxes.
Taking away deductions is not nice, but the AMT system also gives a nice fat exemption. It’s called the Alternative Minimum Tax Exemption.
What is the Alternative Minimum Tax Exemption?
If you are figuring your income tax under the Alternative Minimum Tax, your taxable income will at first seem much higher because you’ve had to add back in all your tax deductions like child tax deduction and standard deduction and itemized deductions like travel expenses for your business and even some medical expenses.
The AMT also makes you add things to your taxable income that are normally tax-free. One example of an income exclusion that won’t be excluded from taxable income anymore would be interest from private-activity bonds. These are government bonds that are supposed to be tax exempt!
But the Alternative Minimum Tax Exemption works the other way: it subtracts income from your taxable amount. The exemption changes to be adjusted for inflation each year, but the 2012 AMT exemption was $50,600 for individual taxpayers. That’s quite a major chunk. For married filing jointly taxpayers the 2012 AMT exemption was $78,750. For married filing separately it was $39,375.
What About the AMT Exemption for Businesses?
Corporations are also subject to the AMT. Only if your business made over $.75 million on average for the past 3 years will it be subject to the Alternative Minimum Tax. Use IRS form 4626 located here on the IRS website. You’ll also want to check out the Form 4626 Instructions. The exemption can mean the business is too small to be subject to the AMT. Different meaning for the word exemption here. But the actual exemption amount, which the corporation can deduct under the AMT system, is $40,000.