Tag Archives: Irs Form 6251

The Alternative Minimum Tax Exemption

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.



What is the Alternative Minimum Tax?

Taxes are tricky: anyone who earns income should be paying federal income tax.  After all, that’s how our government pays for lots of things.  Money doesn’t come from nowhere and as US citizens we pay tax to support our federal government.  It’s our duty as citizens and we should be proud to do so.

Everyone Seeks Tax Advantages

Enter reality.  Nobody likes taxes and we all try to find ways to pay as little as possible.  We hire expensive accountants.  We pay others to prepare our federal tax forms for us, in hopes that they will find us a larger IRS refund or a smaller tax bill, whatever the case may be.

The way these accountants find you ways to save money on your federal tax bill is mainly through tax deductions and tax credits.  There are a lot of them out there, and of course it’s your right to find all the deductions and credits that apply to you.  You definitely don’t want to miss even just one!

An Unfair Tax System?

Some accountants are so good a finding tax advantages that their clients end up paying very little taxes.  It winds up being not such a fair taxation system after all.  Those of us who make more money can afford better tax accountants who will find ways to reduce taxes.  The rich end up paying a lower portion of their income towards taxes while middle class and poor taxpayers pay a higher ration of their income to the IRS.  Not fair!

Enter the alternative minimum tax (AMT).  The IRS pretty much said “phooey” to those accountants and created a bar below which no taxpayer can go below in terms of paying their share.  Even if someone qualifies for every tax deduction and tax credit ever created by the IRS, thus reducing the tax burden to a teensy amount, the alternative minimum tax makes sure they pay a fair amount…regardless of any long list of tax advantages they might have racked up.

How The Alternative Minimum Tax Works

If you make over a certain amount (around $52,000 for individuals in 2013) and claim lots of deductions and exemptions, you may have to figure your federal tax bill twice.  Once in the regular way and again using the alternative minimum tax.  If you’ve lowered your tax bill by a lot through deductions and exemptions then chances are you will pay more than you thought, because of the AMT.

Figuring your AMT is basically figuring your tax without the personal exemption and the standard deduction.  If you are subject to the AMT you also will not be able to deduct state and local taxes.  This ensures that you don’t cut your tax bill down so low that you are paying negligible or no tax at all.  You will use IRS form 6251 for the AMT.

There is something called the IRS Assistant, which is found on the IRS website.  It allows you to determine whether you will be subject to the AMT, without having to actually do your taxes.  It’s located here on their website.