May 5th, 2010 |  Print This Post |  Email This Post

So the Alternative Minimum Tax bug bit you again in 2009.  You sit there looking at your tax return trying to figure it out.  Is there a way to avoid the AMT, or are you stuck in it for life?  The calculations are confusing, yet there are some basic themes underlying all of it that seem to be pushing certain taxpayers into the AMT.  What are these themes, and is there a way to understand how they, and the accompanying calculations, actually work?

Through the month of May we will be publishing a series of articles explaining these themes and these calculations.  Your accountant may have closed up shop for the summer, or you simply may be tired of paying tax return preparation fees without seemingly accomplishing anything.  A little self-help on your part at this time of the year will go a long way toward understanding what happened to you in 2009 and what you can do about it for 2010.

Taxable Income, Tax Brackets and the AMT Exemption – Part I

This article and the next one will look at the basic calculations – the income tax brackets that apply for the Regular Tax, as compared to the AMT, and the AMT exemption and its phase-out and the effect this phase-out has on the computation of the Alternative Minimum Tax.

Taxable income – the starting point

While every taxpayer is different, each of us has a threshold level of income that will trigger the AMT.  What we are talking about is taxable income, which in simple terms is all of your income less all of your allowable deductions.  As a separate but parallel tax system, the Alternative Minimum Tax has different rules on what items of income must be included, and on what deductions are allowed in computing taxable income.  These differences will be explored in future articles.

Once taxable income is computed, one then looks to the tax bracket tables to compute the tax liability.

Tax brackets – the Regular Tax

Here are the 2009 Regular Tax brackets for a couple electing Married Filing Jointly (MFJ).  These and the tax brackets for the other filing statuses may be seen in the Form 1040 instructions, on page 101, found at this URL: http://www.irs.gov/pub/irs-pdf/i1040.pdf.

Tax brackets – the Alternative Minimum Tax

The AMT has one set of brackets, applying to all filing statuses.  Unlike the Regular Tax brackets, they are not indexed for inflation, so they remain constant unless Congress changes them.  These brackets can be seen on the Form 6251, found at this URL: http://www.irs.gov/pub/irs-pdf/f6251.pdf.

The AMT exemption

The AMT exemption for 2009 for MFJ is $70,950.  The exemption levels for the other filing statuses may also be found on the Form 6251 at the URL shown above.  The purpose of the exemption is to prevent taxpayers at lower levels of income from being pulled into the AMT.

For a simple example, refer in the above Regular Tax table to a couple with taxable income of $67,900.  The couple’s Regular Tax liability on this income would be $9,350, with the first $16,700 being taxed at 10% and the balance at 15%.

If there were no AMT exemption, this couple’s AMT would be $17,654 because the full $67,900 of taxable income would be taxed at the AMT’s 26% bracket – far in excess of the 10% and 15% Regular Tax brackets.  With the AMT exemption, however, this couple’s taxable income for Alternative Minimum Tax purposes is zero, so they have no concerns about the AMT.

Summary

The above illustrates the basic calculations behind the Alternative Minimum Tax and the importance of the AMT exemption.  But a provision that affects the amount of the exemption as a taxpayer’s income increases – the “phase-out” of the exemption – will be explored in the next article – Part II.