The Alternative Minimum Tax-The Worst Tax of All!

June 21st, 2014 at 2:38 PM

The Alternative Minimum Tax (AMT) is a tax on your deductions. Yes, you read that right.

Its an additional tax that is calculated and added to the regular tax computed. The AMT stealth tax works by eliminating or reducing taxpayer’s deductions that one gets with the regular tax system and then applying a relatively flat tax to the recomputed income. The lion’s share of AMT revenue comes from the elimination of the following two deductions:

1. Deductions for your state and local taxes (68.3% of AMT revenue)
2. Personal exemptions ( 18.9% of AMT revenue)

Therefore, taxpayer’s incur an additional tax on their taxes and a tax on their children.

How did Congress get away with a tax that targets these two deductions? If lawmakers would have eliminated these deductions outright , the American public would have been outraged. But, because the deduction deletions are hidden inside the AMT, and were bundled with a huge array of new tax laws in 1986, few people realized what had happened or know today what they are actually paying.

Itemized deductions begin to phase out when a taxpayer’s adjusted gross income exceeds $254,200 for singles, and $305,050 for joint filers.

Tax Planning Tips

The AMT grants you a zero deduction for miscellaneous itemized deductions. Therefore, the planning tip is to convert otherwise personal expenses and deductions to business expenses. This protects the deductions from the AMT. Examples are :

1. Home Office–If you operate your business as a Corporation make sure to avoid the AMT on home office deductions through reimbursement

2. Personal Vehicles-If you operate your business as a Corporation, usage of your personal vehicle can be reimbursed by the Corporation
3. Employee Expenses-Make sure to set up and claim business expenses you incur on behalf of the Corporation as proper business expenses, and get reimbursed.

There a several other planning strategies to eliminate the AMT.