If you make more than $37,225 you could be hit by the Alternative Minimum Tax
The Alternative Minimum Tax (AMT) is a parallel system of income tax that makes sure wealthy taxpayers pay at least a minimum amount of tax, primarily by limiting the benefits available from deductions.
You could get hit by the AMT if an adjusted calculation of your taxable income lies beyond a certain threshold, called an exemption. If your income is above the exemption, you must pay either the normal income tax or the Alternative Minimum Tax, whichever is greater.
For 2011 taxes, the AMT exemption levels are $48,450 for single filers and heads of household, $74,450 for married couples filing jointly, and $37,225 for married taxpayers filing separately.
For the early birds already looking ahead to next year, the AMT exemption levels for 2012 taxes are $33,750, $45,000, and $22,500 respectively.
If you qualify for the AMT, you are taxed at 26% for the first $175,000 of income and at 28% for the rest of your income.
One of the major differences between Alternative Minimum Tax and normal income tax is that taxable income is computed differently for the AMT. For example, in the Alternative Minimum Tax
- Personal exemptions and the standard deduction are not allowed
- There is no deduction for state, local, and foreign taxes
- No miscellaneous itemized deductions are allowed
- Only interest on purchase money mortgages for a first or second residence is allowed for the Home Mortgage Interest Deduction
- Only medical expenses that exceed 10% of AGI (as opposed to the normal level of 7.5%) can be deducted
If you do have to pay AMT, submit IRS Form 6251 [Alternative Minimum Tax – Individuals].
Though an early version of the tax came into being in 1969 and the current AMT was enacted in 1982, the AMT is still a hot button issue today.
For one thing, the AMT thresholds are not automatically pegged to inflation like the normal income tax brackets. Congress enacts AMT patches every couple years, but still the tax is catching more and more middle class taxpayers.
This year the upcoming presidential election has put the U.S. tax code front and center. Mitt Romney, for example, recently revealed a new tax plan that proposes eliminating the Alternative Minimum Tax altogether, even though the Tax Policy Center estimated that such an act would add about $670 billion to the deficit over the next ten year.
On the other side of the aisle, President Obama has proposed in his Fiscal Year 2013 Budget the so-called “Buffett Rule,” which would impose a new alternative minimum tax of 30% on every taxpayer whose adjusted gross income is over $1 million.
