Nobody likes it when rich people get away with things. That’s why the government devised the Alternative Minimum Tax system. Several decades ago, too many wealthy Americans were hiring expensive accountants and tax lawyers to find loopholes in the tax code to save them thousands of dollars on their income tax return each year. Lawyers and accountants that nobody else could afford, which made it all the more aggravating for everyone.
The Alternative Minimum Tax Exemption: Sticking to the Original Concept of the AMT
So, the AMT was invented to strip away all those nice deductions and tax credits the lawyers were working so hard to find for the rich people. With the loopholes stripped away, the wealthy weren’t able to duck out of paying their fair share of income taxes.
Of course this makes figuring taxes all the more complicated. That’s because now we essentially have to figure them out twice: once under normal rules and then again under the AMT system. Whichever one benefits the IRS is the one you have to use.
But in keeping with the original concept of the AMT, some people just don’t make enough income to be subject to the AMT. In comes the alternative minimum tax exemption. You still have to figure out your AMT taxable income, which is basically taking your regular taxable income and making a few AMT adjustments to it like…
- home mortgage interest adjustment
- miscellaneous deductions from Schedule A, line 27
- medical and dental deductions
- expenses for investment interest
- net operating loss deduction
- research costs
Then, if your new taxable income under the AMT system, after adding in those deductions and adjustments listed above plus a few more, is more than the alternative minimum tax exemption, you have to pay some additional tax. And voila, you are the latest victim of the Alternative Minimum Tax.
So, What Is the Alternative Minimum Tax Exemption?
Like other figures based on income and affected by inflation, this exemption amount changes every year. It goes up to keep pace with the times. For tax year 2013 it was $51,900 for single filers. That means, after you take your normal AGI (Adjusted Gross Income), add back in the required deductions and other goodies you’re not allowed to have under the AMT system, your taxable income is above the alternative minimum tax exemption amount you’ll have to pay some more tax. However much your taxable income goes over that alternative minimum tax exemption amount, is the additional tax you’ll be forking over to the IRS.