The IRS giveth and the IRS taketh away. You get some nice deductions and tax credits plus other favorable treatment on some of your income, and this helps reduce your taxable income. We like that. But the AMT can take those nice tax benefits away, if it deems your income unworthy of such treatment. You will be taxed differently, and this is called the Alternative Minimum Tax (AMT)We use IRS Form 6251 to figure whether we must pay the AMT.
IRA Form 6251
You will probably be filling out IRS form 6251 if your taxable income is over $50,000. What the form does is add back in all your deductions, including your standard deduction and even your personal exemptions. If, after filling out form 6251, your tax is higher, then that’s the one the IRS makes you use. More money for them!
How to Fill Out Form 6251, Line by Line
- This is your Adjusted Gross Income (AGI). But it’s not the same as the AGI from your 1040 form. Instead, take that 1040 version of your AGI and subtract your itemized deductions. The AMT strips away your itemized deductions. If you took the standard deduction, that goes away too. You also don’t get your deductions for personal exemptions. So, people with lots of kids, who have several personal exemptions (you get one for each kid), adding this back in for the AMT has a pretty big impact.
- Medical expenses. This will only affect you if you itemized your medical expenses. You can still deduct them, but only if they add up to a lot. If your deductions are more than 10% of your AGI then they’re allowed under the AMT.
- On the regular form 1040 you can deduct state and local taxes, real estate taxes and other taxes related to owning property, but not under the AMT. Add these amount back in to your taxable income.
- On the regular form 1040 you can deduct the amount of interest you paid on a Home Equity Loan. You still can under AMT rules, but not if you used the loan for anything other than buying, building or improving your home.
- Other itemized deductions. Under the AMT, on form 6251: forget it. You won’t be deducting things like business expenses if you are an employee. This means getting reimbursed by your employer when you incur business expenses on your own dime. Don’t do this if you are in danger of having to pay the AMT because Form 6251 adds these deductions back in.
- Your state tax refund is not taxable on form 6251.
- IRS form 6251 will change how your investment interest is treated for tax purposes. Better see the IRS instructions for form 6251.
- Now we’re getting into some very minute ways the AMT can change your taxes. As we get further down the list of things to add back to your taxable income, it’s less and less likely that they will apply to you. This one is depletion: are you involved in mining activity? how about the timber industry? Only if you answer yes to these will line 9 of form 6251 have any effect on your tax rate.
- own your own business and it operated at a loss? add it back in if you deducted it on form 1040.
- Did you claim a (Net operating loss) NOL last year too? Then line 11 applies to you.
- Do you buy private activity bonds? If not, skip line 12.
- Did you sell stock from your own small business? No? move on.
- Did you exercise Incentive Stock Options? again, if not then next line.
- Are you involved in an estate or trust with a deduction? if not, next line.
- Partner in a partnership?
There are 27 lines of things to add to your AGI on form 6251 but we’re going to stop here, just over halfway. That’s because, as you may have noticed, the items to add to your new AGI under AMT rules are getting more and more obscure. For a more complete look at IRS form 6251 go directly to the source on the IRS website. You’ll see the complete list of 27 things you may be taxed on if you get caught in the AMT web.