Every year taxpayers need to consider whether they will have to pay the Alternative Minimum Tax (AMT). The AMT Assistant is intended to provide a simple test for taxpayers who fill out their tax returns without using software to determine whether they may be subject to the AMT.
Using the AMT Assistant
The AMT Assistant is easy to use. You just answer a few simple questions about entries on your draft 1040 and the system does the rest. You will see the results immediately on your computer screen. Based on your entries, the results will tell you that either you do not owe the AMT or that you must go further and complete Form 6251 to find out if you owe the AMT.
Your entries are anonymous and the information will be used only for the purpose of determining your eligibility. All entries are erased when you exit or start over. See the “IRS Privacy Policy” for more information.
The Assistant can be used by individuals, tax practitioners and community or public service organizations.
Tax Year 2010 AMT Assistant
Tax Year 2009 AMT Assistant
Tax Year 2008 AMT Assistant
Tax Year 2010 Additional Resources:
Form 1040 Instructions (PDF)
Form 1116, Foreign Tax Credit (Individual, Estate, or Trust) (PDF)
Form 1116 Instructions
Form 6251, Alternative Minimum Tax – Individuals (PDF)
Form 6251 Instructions
Tax Year 2009 Additional Resources:
Tax Tip 2010-33 - Seven facts to help you Understand the Alternative Minimum Tax
Tax Year 2008 Additional Resources:
IR-2008-19 - IRS Successfully Processing Tax Forms Affected by AMT Legislation
AMT and Filing Season 2008: Q&A
Thursday, September 29, 2011
AMT Calculator and Planner
AMT Calculator and Planner
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This site has a full deatured program for $49.00 that is easy and effective to use.
Try is today
Foriegn Tax Credit or Deduction for AMT
PRACTICE TIP: For most taxpayers, it is usually more advantageous to
take the foreign tax credit than to take a deduction for foreign
taxes paid. A deduction from income serves only to reduce taxable
income while the credit reduces actual tax liability. On a dollar
basis, a tax deduction is only worth the value of the taxpayer's
maximum tax bracket for that income. The credit, on the other hand,
reduces the taxpayer's actual U.S. tax liability by the dollar amount
of the qualifying foreign taxes paid.
EXAMPLE 1: A taxpayer is in the 27.5 percent U.S. income tax bracket
for 2001. His deduction of $1,000 in foreign taxes paid is worth, at
most, $280 (less in later years, when the brackets will be lower),
the value of his maximum income tax bracket. If he elects the foreign
tax credit, the $1,000 is worth $1,000. If qualifying, the taxpayer
deducts (credits) his overall U.S. tax liability by the full amount
of $1,000 for the foreign taxes he paid.
EXAMPLE 2: A U.S. taxpayer receives a $1,000 dividend from a foreign
corporation in 2001. He pays tax to the foreign country, at a 30
percent rate, a tax of $300. His U.S. marginal tax rate is 30.5
percent. If he deducts the $300 foreign tax (leaving him with a
taxable income of $700) he pays a $214 United States tax ($700 x 30.5
percent = $214). His total tax liability on $1,000 of taxable income
therefore, is $514 ($300 plus $214 = $514). If, however, the taxpayer
elects to credit the $300 foreign tax against his $305 United States
tax ($1,000 x 30.5 percent = $305) otherwise due, his United States
tax is $5 ($305 minus $300 = $5). His total tax liability is $305,
which is $209 less than if he had taken the deduction.
However, there are circumstances in which the deduction is more
beneficial than the credit. For example, although excess credit
carryovers are allowed, if a taxpayer has insufficient foreign source
income to claim the credit, the carryovers have time limits and might
expire before they can be absorbed. Also, if the taxpayer will suffer
an overall net operating loss (NOL), he would have no tax liability
against which to use the credit. A deduction in this case would
increase the NOL. Thus, in effect, the taxpayer would extend the time
period for a carryforward from the five-year period allowed the
credit to the twenty-year period allowed the NOL. Code Section
172(b)(1)(A)(ii). For most taxpayers however,
the credit will usually be preferable.
CAUTION: A taxpayer claiming the foreign tax credit may be liable for
the alternative minimum tax (AMT) under Code Section 55(a). A set of
special rules applies for the "alternative minimum
foreign tax credit." See Code Section 59. The AMT
generally is discussed in Ch. 60. The AMT foreign tax
credit is specifically covered in Section 60.13
In certain circumstances, the credit may be denied altogether. The IRS has
published its concerns that certain taxpayers (primarily multinational
corporations) may enter into arrangements that would lead to abuse of the
foreign tax credit. In the IRS's view, abusive arrangements generally are
those that yield little or no economic profit relative to the expected
U.S. tax benefits derived from the availability of the foreign tax credit;
they thus provide a shelter for low-taxed foreign-source income from a
residual U.S. tax. Such arrangements are more fully described in Notice
98-5, 1998-1 C.B. 334.
Read the full story here.
take the foreign tax credit than to take a deduction for foreign
taxes paid. A deduction from income serves only to reduce taxable
income while the credit reduces actual tax liability. On a dollar
basis, a tax deduction is only worth the value of the taxpayer's
maximum tax bracket for that income. The credit, on the other hand,
reduces the taxpayer's actual U.S. tax liability by the dollar amount
of the qualifying foreign taxes paid.
EXAMPLE 1: A taxpayer is in the 27.5 percent U.S. income tax bracket
for 2001. His deduction of $1,000 in foreign taxes paid is worth, at
most, $280 (less in later years, when the brackets will be lower),
the value of his maximum income tax bracket. If he elects the foreign
tax credit, the $1,000 is worth $1,000. If qualifying, the taxpayer
deducts (credits) his overall U.S. tax liability by the full amount
of $1,000 for the foreign taxes he paid.
EXAMPLE 2: A U.S. taxpayer receives a $1,000 dividend from a foreign
corporation in 2001. He pays tax to the foreign country, at a 30
percent rate, a tax of $300. His U.S. marginal tax rate is 30.5
percent. If he deducts the $300 foreign tax (leaving him with a
taxable income of $700) he pays a $214 United States tax ($700 x 30.5
percent = $214). His total tax liability on $1,000 of taxable income
therefore, is $514 ($300 plus $214 = $514). If, however, the taxpayer
elects to credit the $300 foreign tax against his $305 United States
tax ($1,000 x 30.5 percent = $305) otherwise due, his United States
tax is $5 ($305 minus $300 = $5). His total tax liability is $305,
which is $209 less than if he had taken the deduction.
However, there are circumstances in which the deduction is more
beneficial than the credit. For example, although excess credit
carryovers are allowed, if a taxpayer has insufficient foreign source
income to claim the credit, the carryovers have time limits and might
expire before they can be absorbed. Also, if the taxpayer will suffer
an overall net operating loss (NOL), he would have no tax liability
against which to use the credit. A deduction in this case would
increase the NOL. Thus, in effect, the taxpayer would extend the time
period for a carryforward from the five-year period allowed the
credit to the twenty-year period allowed the NOL. Code Section
172(b)(1)(A)(ii). For most taxpayers however,
the credit will usually be preferable.
CAUTION: A taxpayer claiming the foreign tax credit may be liable for
the alternative minimum tax (AMT) under Code Section 55(a). A set of
special rules applies for the "alternative minimum
foreign tax credit." See Code Section 59. The AMT
generally is discussed in Ch. 60. The AMT foreign tax
credit is specifically covered in Section 60.13
In certain circumstances, the credit may be denied altogether. The IRS has
published its concerns that certain taxpayers (primarily multinational
corporations) may enter into arrangements that would lead to abuse of the
foreign tax credit. In the IRS's view, abusive arrangements generally are
those that yield little or no economic profit relative to the expected
U.S. tax benefits derived from the availability of the foreign tax credit;
they thus provide a shelter for low-taxed foreign-source income from a
residual U.S. tax. Such arrangements are more fully described in Notice
98-5, 1998-1 C.B. 334.
Read the full story here.
Reduce AMT
Reduce your Alternative Minimum Taxes
Here is an example of extreame case and a few good suggestions.
By ALEKSANDRA TODOROVA
SITTING IN HIS
accountant's office earlier this year, 63-year-old Joseph Halstead of San Diego, Calif., was contemplating a divorce despite being very happily married for the last 13 years.
The culprit: The Halsteads' annual income a little over $220,000 combined with their ownership of four rental properties, is throwing them smack in the middle of the dreaded alternative minimum tax trap. As a result, federal and state taxes are eating up more than 40% of their 2007 income, not to mention the fact that they lose some valuable deductions, including state and local income tax and property-tax write-offs.
If they were to divorce, however, Halstead could deduct the $48,000 in alimony payments he'd make to his wife and lessen the AMT hit on his $170,000 income. His wife, with only $50,000 in earnings, would avoid the AMT altogether. And, at that point, they could even deduct most of their rental property losses nearly $30,000 for this year which would further increase their tax savings.
For better or for worse, Halstead's wife isn't the divorcing kind. "We're pretty traditional and she wouldn't have it," he says. Their five daughters, he adds, would also be "overly upset if Mama and I got divorced."
So instead of family court, Halstead flew to Florida a few weekends ago, arranging for the sale of one of the rental properties that was supposed to generate part of their future retirement income. Getting rid of the house now, even at a loss of $40,000, he reasons, would make more sense over the long term since most of the deductions associated with it aren't allowed by the AMT anyway.
Such are the unintended consequences of the AMT. Introduced in 1969, this alternative taxation system was designed to prevent the wealthiest Americans from taking so many deductions that they end up paying little or no taxes at all. But while the regular tax system is indexed for inflation, the AMT is not. Once intended for America's highest earners, the AMT now hits more middle-income folks than ever before.
Only 20,000 taxpayers were subject to the AMT in 1970, according to research by the Tax Policy Center, a nonpartisan group. In 2007, it hit 3.5 million. Half of those taxpayers earned between $200,000 and $500,000 and another 5% earned less than $200,000. By 2010, the group says, the AMT will reach more than 80% of filers earning between $100,000 and $200,000 and half of those earning between $75,000 and $100,000.
For more details on how the AMT works, read our story
That extra cost would be even higher were it not for the AMT patch Here are some other strategies people use to avoid getting hit by the AMT.
Delaying payment of state taxes
Not paying one's taxes on time is an unwise not to mention expensive
proposition
. But that's exactly what Wendy Shick, principal of tax services at Ohio-based accountancy firm Rea & Associates, advised a client to do to avoid the AMT several years ago. Shick's client had a large capital gain that would have increased his Ohio state tax liability and therefore trigger the AMT. By extending his payments over two years, he paid Ohio a penalty, but avoided the higher tax. "That penalty was less than what he would have owed with AMT," she says.
It's a strategy that may work for taxpayers who realize large capital gains in one year, but don't otherwise earn enough to be subject to the AMT. The catch: The longer they stretch those state tax payments out, the more penalties they'll have to pay, which could potentially offset the tax savings.
Moving to another state
States like New York, California or Ohio, which have high state and local income tax rates, or New Jersey, known for its high property taxes, are red-hot spots for the AMT. For some people, moving to another state is well worth the trouble, given the potential tax savings.
Tim Speiss, head of the Personal Wealth Advisors group at accounting firm Eisner LLP, says he's had clients move to Pennsylvania from New York or New Jersey in order to escape the AMT. "It's not that terribly far, it's easy to get to and it has a 3% income tax rate," he notes. "We have virtually no clients in Pennsylvania who pay the AMT, and it's primarily due to the fact that when the state tax is so low, the disallowance is not large enough to put someone in AMT."
One snag: A taxpayer who moves to another state, but keeps their old home as a part-time residence, Speiss warns, is at risk for an IRS audit. The IRS may suspect rightfully so, in many cases that the person still lives in the higher-tax state, but is maintaining a residence in another state to lower their tax bill, he explains.
Asking for a smaller salary and bigger expense account
Another common AMT victim: employees with a high level of unreimbursed business expenses that they later deduct from their taxable income. "For sales people, consultants...all those employee business expenses add to their exposure to the AMT," says Jeff Schnepper, author of "How to Pay Zero Taxes." He advises that employees in this situation ask for a lower salary, but a bigger expense account. It's a win-win situation for both sides: The employer will pay less Social Security and Medicare tax since the employee's wages will be lower, and with fully-reimbursed business expenses, the employee's take-home pay will remain untouched by the AMT, he says.
For the full article read here.
Here is an example of extreame case and a few good suggestions.
By ALEKSANDRA TODOROVA
SITTING IN HIS
accountant's office earlier this year, 63-year-old Joseph Halstead of San Diego, Calif., was contemplating a divorce despite being very happily married for the last 13 years.
The culprit: The Halsteads' annual income a little over $220,000 combined with their ownership of four rental properties, is throwing them smack in the middle of the dreaded alternative minimum tax trap. As a result, federal and state taxes are eating up more than 40% of their 2007 income, not to mention the fact that they lose some valuable deductions, including state and local income tax and property-tax write-offs.
If they were to divorce, however, Halstead could deduct the $48,000 in alimony payments he'd make to his wife and lessen the AMT hit on his $170,000 income. His wife, with only $50,000 in earnings, would avoid the AMT altogether. And, at that point, they could even deduct most of their rental property losses nearly $30,000 for this year which would further increase their tax savings.
For better or for worse, Halstead's wife isn't the divorcing kind. "We're pretty traditional and she wouldn't have it," he says. Their five daughters, he adds, would also be "overly upset if Mama and I got divorced."
So instead of family court, Halstead flew to Florida a few weekends ago, arranging for the sale of one of the rental properties that was supposed to generate part of their future retirement income. Getting rid of the house now, even at a loss of $40,000, he reasons, would make more sense over the long term since most of the deductions associated with it aren't allowed by the AMT anyway.
Such are the unintended consequences of the AMT. Introduced in 1969, this alternative taxation system was designed to prevent the wealthiest Americans from taking so many deductions that they end up paying little or no taxes at all. But while the regular tax system is indexed for inflation, the AMT is not. Once intended for America's highest earners, the AMT now hits more middle-income folks than ever before.
Only 20,000 taxpayers were subject to the AMT in 1970, according to research by the Tax Policy Center, a nonpartisan group. In 2007, it hit 3.5 million. Half of those taxpayers earned between $200,000 and $500,000 and another 5% earned less than $200,000. By 2010, the group says, the AMT will reach more than 80% of filers earning between $100,000 and $200,000 and half of those earning between $75,000 and $100,000.
For more details on how the AMT works, read our story
That extra cost would be even higher were it not for the AMT patch Here are some other strategies people use to avoid getting hit by the AMT.
Delaying payment of state taxes
Not paying one's taxes on time is an unwise not to mention expensive
proposition
. But that's exactly what Wendy Shick, principal of tax services at Ohio-based accountancy firm Rea & Associates, advised a client to do to avoid the AMT several years ago. Shick's client had a large capital gain that would have increased his Ohio state tax liability and therefore trigger the AMT. By extending his payments over two years, he paid Ohio a penalty, but avoided the higher tax. "That penalty was less than what he would have owed with AMT," she says.
It's a strategy that may work for taxpayers who realize large capital gains in one year, but don't otherwise earn enough to be subject to the AMT. The catch: The longer they stretch those state tax payments out, the more penalties they'll have to pay, which could potentially offset the tax savings.
Moving to another state
States like New York, California or Ohio, which have high state and local income tax rates, or New Jersey, known for its high property taxes, are red-hot spots for the AMT. For some people, moving to another state is well worth the trouble, given the potential tax savings.
Tim Speiss, head of the Personal Wealth Advisors group at accounting firm Eisner LLP, says he's had clients move to Pennsylvania from New York or New Jersey in order to escape the AMT. "It's not that terribly far, it's easy to get to and it has a 3% income tax rate," he notes. "We have virtually no clients in Pennsylvania who pay the AMT, and it's primarily due to the fact that when the state tax is so low, the disallowance is not large enough to put someone in AMT."
One snag: A taxpayer who moves to another state, but keeps their old home as a part-time residence, Speiss warns, is at risk for an IRS audit. The IRS may suspect rightfully so, in many cases that the person still lives in the higher-tax state, but is maintaining a residence in another state to lower their tax bill, he explains.
Asking for a smaller salary and bigger expense account
Another common AMT victim: employees with a high level of unreimbursed business expenses that they later deduct from their taxable income. "For sales people, consultants...all those employee business expenses add to their exposure to the AMT," says Jeff Schnepper, author of "How to Pay Zero Taxes." He advises that employees in this situation ask for a lower salary, but a bigger expense account. It's a win-win situation for both sides: The employer will pay less Social Security and Medicare tax since the employee's wages will be lower, and with fully-reimbursed business expenses, the employee's take-home pay will remain untouched by the AMT, he says.
For the full article read here.
Alternative Minimum Tax Calculator
Alternative Minimum Tax Calculator
Six Facts the IRS Wants You to Know about the Alternative Minimum Tax
IRS Tax Tip 2011-47, March 8, 2011
The Alternative Minimum Tax attempts to ensure that anyone who benefits from certain tax advantages pays at least a minimum amount of tax. The AMT provides an alternative set of rules for calculating your income tax. In general, these rules should determine the minimum amount of tax that someone with your income should be required to pay. If your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax.
Here are six facts the Internal Revenue Service wants you to know about the AMT and changes for 2010.
Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. These benefits can drastically reduce some taxpayers’ tax obligations. Congress created the AMT in 1969, targeting higher-income taxpayers who could claim so many deductions they owed little or no income tax.
Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.
You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.
The AMT exemption amounts are set by law for each filing status.
For tax year 2010, Congress raised the AMT exemption amounts to the following levels:
$72,450 for a married couple filing a joint return and qualifying widows and widowers;
$47,450 for singles and heads of household;
$36,225 for a married person filing separately.
6. The minimum AMT exemption amount for a child whose unearned income is taxed at the parents' tax rate has increased to $6,700 for 2010.
Use the IRS AMT Assistant to determine whether you may be subject to the AMT. Taxpayers can find more information about the Alternative Minimum Tax and how it impacts them by accessing IRS Form 6251, Alternative Minimum Tax —Individuals, and its instructions at http://www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
Links:
AMT Assistant
IRS Form 6251, Alternative Minimum Tax—Individuals
Six Facts the IRS Wants You to Know about the Alternative Minimum Tax
IRS Tax Tip 2011-47, March 8, 2011
The Alternative Minimum Tax attempts to ensure that anyone who benefits from certain tax advantages pays at least a minimum amount of tax. The AMT provides an alternative set of rules for calculating your income tax. In general, these rules should determine the minimum amount of tax that someone with your income should be required to pay. If your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax.
Here are six facts the Internal Revenue Service wants you to know about the AMT and changes for 2010.
Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. These benefits can drastically reduce some taxpayers’ tax obligations. Congress created the AMT in 1969, targeting higher-income taxpayers who could claim so many deductions they owed little or no income tax.
Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.
You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.
The AMT exemption amounts are set by law for each filing status.
For tax year 2010, Congress raised the AMT exemption amounts to the following levels:
$72,450 for a married couple filing a joint return and qualifying widows and widowers;
$47,450 for singles and heads of household;
$36,225 for a married person filing separately.
6. The minimum AMT exemption amount for a child whose unearned income is taxed at the parents' tax rate has increased to $6,700 for 2010.
Use the IRS AMT Assistant to determine whether you may be subject to the AMT. Taxpayers can find more information about the Alternative Minimum Tax and how it impacts them by accessing IRS Form 6251, Alternative Minimum Tax —Individuals, and its instructions at http://www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
Links:
AMT Assistant
IRS Form 6251, Alternative Minimum Tax—Individuals
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