In a previous post I discussed the dangers to unwary taxpayers of Income in Respect of a Decedent (IRD), which I include in the category of “stealth taxes;” taxes that are particularly difficult to identify or isolate.The Alternative Minimum Tax (AMT) is yet another “stealth tax” that can unpleasantly surprise. This tax is particularly damaging to middle to high income earners because of its unintended consequences. Many have heard about the AMT but have little idea of exactly how it works and from how many avenues this tax can attack you. The best way to understand the AMT is to think of it as a parallel tax system that was created to ensure that high income individuals, corporations, trusts, and estates paid at least some amount of income tax. The AMT has turned into a trap for the unwary. It has not only affected those who are high income earners but it has also now begun to heavily burden many middle income earners who may not have ever even heard of the tax.
One reason this has occurred is that while the regular tax brackets, exemptions, and standard deductions are adjusted annually for inflation, the AMT brackets and exemptions are not. In 1970 19,000 people owed the AMT. Today millions are paying this tax because their income has grown with the economy and inflation but the AMT has not been adjusted accordingly. By 2017, if the current AMT is left intact, the Tax Policy Center is projecting that 90% of households with annual incomes between $100,000-$500,000 will be subject to AMT tax.
The AMT comes into play when a person has a large amount of:
- Itemized Deductions;
- Dependents or Children;
- Exercised Incentive Stock Options;
- Personal Property Taxes.
This occurs because the AMT does not allow many itemized deductions, places higher reductions on several, and completely disallows others. It also reduces many regular tax credits.
Income over the AMT exemption amounts may be subject to the AMT. The AMT exemption amounts for 2014 are as follows:
- $52,800 for single and head of household filers,
- $82,100 for married people filing jointly and for qualifying widows or widowers, and
- $41,050 for married people filing.
Unlike ordinary tax rates, the AMT has only two tax brackets of 26% and 28%. The AMT tax rate is assessed only on AMT income over the exemption amount.
For 2014, the threshold where the 26% AMT tax bracket ends and the 28% AMT tax bracket begins is:
- $91,250: for married filing separately, and
- $182,500: for any other filing status.
Yee Law Group Inc.: Sacramento and Roseville Area Tax Attorneys
The lack of sound tax planning can cost you; the lack of trusted and experienced tax counsel can cost you even more. At Yee Law Group Inc., we use our deep knowledge of domestic and international tax law to our clients’ advantage, and work closely with them to put them in the strongest position to keep tax liabilities, and tax authorities, at bay. If you’d like to discuss your tax questions or concerns, please give us a call at (916) 599-7297. We look forward to the privilege of being your attorneys.