Even if you have never heard of the Alternative Minimum Tax (AMT), it might be confusing and complicate your financial planning in ways you weren’t expecting. The effects of AMT on your financial status are discussed in detail in this article.
In the 1960s, the AMT was developed to discourage wealthy taxpayers from using deductions to avoid paying federal income taxes via the regular method. For individuals, trusts, and estates, the AMT system is a supplement to the federal income tax. Until the Tax Cuts and Jobs Act of 2017, corporations were also liable to the alternative minimum tax (AMT). Taxpayers’ “fair share” of the AMT in a particular tax year is computed. When it comes to individuals, the AMT system recalculates income taxes by removing certain basic and itemised deductions and exemptions and then adding back particular tax preference items.
Listed below are some of the most common preferences that impact AMT. For the purpose of this essay, we’ve omitted a number of criteria that are less prevalent. The entire data may be found on IRS Form 6251.
- Compensation for exercising stock options: capital gains (i.e., Incentive Stock Options)
- The exclusion of small-business stock from the definition
- Bonds issued for private use pay interest.
- Deductions for the depreciation occurs more quickly.
To establish the amount subject to AMT rates, the yearly AMT exemption is used after calculating the Alternative Minimum Taxable Income (AMTI). The AMT exemption for single taxpayers will be $73,600 in 2021; for married couples filing jointly, the exemption will be $114,600. For solo taxpayers, the exemption ends at $523,600; for married couples filing jointly, it ends at $1,047,200.
First, $199,900 in AMT taxes is subject to a tax rate of 26% based on the minimum tax base established (as of 2021). The second and final AMT tax rate of 28% is applied to any amounts over this point in order to compute your total AMT obligation. If your standard tax is due or your AMT liability is greater, you will owe the greater amount.
It’s not uncommon for us to encounter customers who first learn about AMT via the use of Incentive Stock Options (ISOs). As a strategy to encourage an employee to contribute to the growth of the company’s value, several organisations give ISOs instead of yearly income. To learn more about Incentive Stock Options and the implications of AMT, please visit our blog in the near future.
Most taxpayers never have to deal with AMT, but for those who do, it may be a total shock. Our team at Merriman Financial takes a detailed look at your financial situation. In most cases, it is best to consult a CPA when it comes to dealing with the AMT because of the changing dates and intricacy of the tax. Merriman would be happy to discuss your case with you in further depth.
For more information on Incentive Stock Options, keep an eye out for our next blog article! (ISOs).