Many individuals with a higher income may be subject to the Alternative Minimum Tax (AMT). AMT is a parallel tax calculation to the regular tax. It was designed to ensure that taxpayers who take a large number of tax preference deductions pay a minimum amount of tax on their income. It is mandatory if it exceeds the regular tax.
So how is the AMT different from regular Income tax? The answer is in many ways:
- Many of the deductions and credits allowed under the regular tax system are not allowed here. Some of the key deductions and credits not allowed under the AMT are personal exemption, standard deductions or in case you are itemizing, state, local, sales & property taxes, interest on second mortgages, and miscellaneous expenses (subject to 2% threshold). There is also a higher threshold for medical expenses.
- In lieu of the above deductions, you get a fixed deduction ($82,100 for married filing jointly for 2014) which is also subject to phase out in case your income is too high.
- The maximum tax rate is 28% as opposed to 39.6% in the regular tax system. But remember this 28% is a flat rate on a higher taxable income, resulting in higher taxes payable.
Proper tax planning may help you avoid some of these higher taxes you may be subject to. Please give us a call and we will be able help you in your tax planning needs for the coming year.
posted by Tripti Kedia, CPA