John M. Hoffman & Associates CPAs

Frequently Asked Questions

Alternative Minimum Tax (AMT)

"How is the AMT calculated?"

The AMT is calculated on form 6251, so our first advice is to look at your tax return and see if there is a form 6251 in it. If there is, and there is an amount on line 35, you are paying AMT.

In simple terms, the AMT starts with your regular taxable income before personal exemptions. Please note that by starting before personal exemptions the AMT is not allowing your personal exemptions the way that the regular tax does.

Then we have all the add backs of what are called preference items:

• Medical and dental expenses deducted that are less than 10% of your adjusted gross income.

• Taxes - the most common add back of significance - this means that the AMT is not allowing a deduction for what you pay in state and local income tax, real estate tax, auto excise tax, or sales tax if applicable.

• Interest on certain tax exempt bonds (apparently they are not so tax exempt).

• Depreciation expense if you are claiming it too fast.

• Incentive stock option income (this can be a VERY big item).

• A handful of other items that you would need a combined law and tax degree to understand.

This brings you to what is called the alternative minimum taxable income (AMTI).

Then you get an exemption. We told you a moment ago that the AMT does not give you an exemption, but in reality it might. It is very different than the regular tax exemption. The AMT exemption does not care how many children you have. There are amounts for single, married filing joint, and married filing separate - pick one!

Not so fast - if your income is above some threshold that exemption then gets taken away. A married couple starts with an exemption of $62,550 (for 2006). This gets phased out as your AMTI gets over $150,000 (2006 amount for married filing joint - less for other filing status). We are still waiting to see what happens to this exemption for 2007, it is currently scheduled to be reduced putting more people in more AMT.

After you deduct the exemption that you are entitled to you then apply a flat rate of 28% to the exemption reduced AMTI (sort of). Sort of because it really is not flat as the first $175,000 of such taxable amount (for a married couple) is taxed at 26% and only the amount above that is taxed at 28%. Don't forget that the long term capital gains and dividends are given that same preferential tax rate of 5 or 15 % so even what is supposed to be sort of a flat tax rate gets complicated.

Once you have figured this amount, you compare it to your regular tax and to the extent that the AMT amount exceeds the regular tax, you treat the excess as the AMT amount.