My First Encounter with the Alternative Minimum Tax (AMT)
Tip It!This article is a guest blogger submission written by ‘frugal’ and first published at 1stMillionAt33. If you like what you see, why not subscribe to his RSS feed?
If you have never paid the AMT or Alternative Minimum Tax, you may not be familiar with the intricacies of this ‘other’ tax system. About 2 or 3 years ago, I knew that most likely I had to pay the AMT that year. So in order to reduce my federal income tax, I did what I normally do, over-paying or pre-paying my state and property tax so that I can have more itemized deduction, hoping to reduce my federal tax and AMT.
Everything was well-planned and well-executed. But the next year when I tried to file my taxes, I finally discovered the stupidity of my tax strategy. On the AMT tax form 6251, line #3, you actually add back all the state and property tax when you calculate your AMT income. So by over-paying my state tax, I actually got zero tax benefit for the current year, while at the same time, getting a bigger state tax refund to be taxed federally for next year. By pre-paying my property tax, I got no benefit for federal tax, and slight benefit for my state tax. My tax strategy totally back-fired.
After that incident, I’ve made my own tax calculator to estimate my regular and AMT taxes so that I don’t make the same stupid mistake again. Going through Form 6251 once, I also learned other details, such as mortgage interest is deductible from AMT income, but the interest from a refinancing loan is not. And personal and child exemption amounts are all added back to the AMT income. The most significant saving grace from paying AMT is the AMT exemption amount which is $58,000 for year 2005. However, in 2006, this exemption amount is dropping back to $45,000, and is going to affect some 15 million people. Congress has not been able to pass the AMT tax reforms, because they need to find additional tax dollars from elsewhere if they ever extend the 2005 exemption amount of $58,000 for year 2006 and beyond. You can write to your congressman if you think this tax issue will affect you. I think the AMT should not be meant for a working family with 1 or 2 children, but rather for richer people.
Published on June 30th, 2006 - 2 Comments
Filed under: Taxes
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
Related articles...
» More AMT Insights» From the Archives (June 24th – June 30th)
» Congress Passes Temporary Fix for the Alternative Minimum Tax
» The Buffett Tax: Re-Defining the AMT?
» From the Archives (June 8th – July 5th)
» Income Tax Breaks in the Bailout Bill
» What is the Alternative Minimum Tax (AMT)?
» Taxpayer Benefits in the Economic Stimulus Package
Was this article useful? Please sign up to receive our content via e-mail:
2 Responses to “My First Encounter with the Alternative Minimum Tax (AMT)”
Leave a Reply
Top Cards by Category
Earn $200 Bonus Cash Back after you make $500 in purchases in your first 3 months. 5% Cash Back on up to $1,500 spent in bonus categories each quarter.
Receive 10,000 Membership Rewards bonus points when you spend $500 in your first three months of card membership. Redeem bonus points for gift cards valued at $100. This is a charge card with no pre-set spending limit.
Receive 10,000 Membership Rewards bonus points when you spend $1,000 in 3 months of Card membership.
Enjoy a 0% introductory rate for 18 months on Balance Transfers and 6 months on Purchases. Earn up to 5% cash back in categories that change.
Enjoy no balance transfer fee for a limited time. 0% introductory rate on Balance Transfers and Purchases. Earn up to 5% Cashback Bonus in categories that change like gas, restaurants, department stores and more. Limitations apply*
Enjoy no balance transfer fee for a limited time. 0% introductory rate on Balance Transfers and Purchases. Earn up to 5% Cashback Bonus in categories that change like gas, restaurants, department stores and more. Limitations apply*
Enjoy amenities for you and your business, like: complimentary airport club access, including American Airlines Admirals Club(R) lounges.
5% Cashback Bonus in categories that change like gas, restaurants, department stores and more. Limitations apply*. Up to 1% unlimited Cashback Bonus on everything else. No annual fee
Earn 3X points on airfare, 2X points on gas and groceries, and 1X points on everything else.
Reports to 3 major credit bureaus monthly and acceptance at millions of locations worldwide, including website purchases and reservations.
- How to Become a Millionaire
- How to Get Out of Debt
- The Best Dollars I've Ever Spent
- How Our Estate Plan is Structured
- How We Paid Our Mortgage In Less than 10 Years
- Money Making Ideas
- How to Manage Your Asset Allocation with Multiple Accounts
- Consumption Smoothing - Save While the Saving's Good
- How to Save on Groceries
- How Much Life Insurance Do You Need?
- Eleven Great Books About Money
- Dave Ramsey is Bad at Math
- Dish Network Customer Service SUCKS
- $8,000 Homebuyer Tax Credit
- Pay Off Mortgage Early or Invest?
- How to Claim the First-Time Homebuyer Tax Credit
- Reduced Credit Limits? Share Your Experience
- $15,000 Homebuyer Tax Credit
- Ethanol Blended Gas = Lower Mileage?
- Termite Control: Sentricon vs. Termidor
- How Much Should You Pay a Babysitter?
- Federal Income Tax Rates Went Down but Your Federal Tax Withholding Increased. Here's Why...
- Would the "Fair Tax" Gut the Economy?
How to save money on insurance
- Double-Check Your Ally CDs
- Stocks are Not Bonds, CDs, or Savings Accounts
- The Best Values in Colleges - 2012 Edition
- Five Myths About Renter's Insurance
- Own Your Investments, Rent Your Fun
- Citibank to Issue Credit Cards in China
- Heartstrings and Pursestrings
- Saving Money at the Grocery Store: Store Brand Pricing on the Rise
- Missing Tax Paperwork?
- Is Your Investment Allocation Right?
June 30th, 2006 at 10:07 am
The $58,000 exemption for 2005 was just recently increased to $62,550 for 2006 only, with more action needed to extend it beyond 2006. Here’s the details:
One-year Alternative Minimum Tax Fix
TIPRA includes two quick fixes, for this year only, to the individual alternative minimum tax (AMT) rules. These changes will prevent millions more (possibly including you) from owing the dreaded AMT this year. Under the first fix, the 2006 AMT exemption amounts are increased as follows:
* To $62,550 for married individuals who file jointly (up from the 2005 figure of $58,000). Without the fix, the 2006 exemption would have been only $45,000.
* To $42,500 if you are a single individual or head of household (up from the 2005 figure of $40,250). Without the fix, the 2006 exemption would have been only $33,750.
Under the second fix, you can use your nonrefundable personal tax credits (such as the dependent care credit and the Hope Scholarship and Lifetime Learning higher education credits) to reduce both your 2006 regular tax and AMT bills (same as for 2005). You will also be able to use the new residential and nonbusiness energy property credits to reduce both of these taxes for 2006. So, if you are considering making energy efficient improvements to your home, you might want to do it now rather than waiting until next year.
November 12th, 2006 at 11:48 pm
Under the second fix, you can use your nonrefundable personal tax credits (such as the dependent care credit and the Hope Scholarship and Lifetime Learning higher education credits) to reduce both your 2006 regular tax and AMT bills (same as for 2005).