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Written by Wei-Jing Zhu
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Page 1 of 2 This year more people are hit with the Alternative M Tax. Here we present AMT in a simple to understand fashion. This is a rehash of I wrote 2 years ago at blogdrive.
For typical double earner high income families, we are stuck with AMT. Now the issue is to understand what is really going on, rather than getting lost in all the jargon and complexity of AMT navigation.
Simply, we have two categories of potential exemptions in tax deduction.
Type 1: valid deductions in standard and AMT calculations:
- mortgage interest
- donations
Type 2: standard deductions, no longer valid under AMT
- personal exemptions
- state and local (property, school) taxes paid
- miscellaneous itemized deductions
- deductible medical expenses
- Incentive Stock Options
- capital gains
The AMT effectivly places a cap on how much of Type 2 deductions you may have. (Appendix to this article will show the exact calculation of that limit.) Once you reach the limit, having more deduction is useless. (In deliberately complex AMT language, you are paying "AMT tax" to make up for all the tax deduction that the excess deduction would normally offers. This sounds better than saying straight out that the government decided to void all the deduction possibilities.)
So for most high double income families, state and property tax already causes us to go into AMT territory. This means that we don't even have to think how much of each deduction we have.
Most simply, the government demand that we pay a certain fixed amount of tax, and the only "real" deduction we can claim is the type 1 above, namely, mortgage interest and donations.
This should encourage charity donation and buying bigger houses.
Fei had commented before:
- If part of your AMT taxable income is long-term capital gain or dividend, that portion is taxed at lower rate (e.g., 15%) as like in regular tax system, instead of AMT rate (26%, 28%, .... )
- This means rich people whose income are mainly from stocks or dividends are not paying AMT rates, they are paying 15%.
- So the lesson is: turn your wage into capital gain or dividends. How? open your own business :-)
Next page is detail calculation of AMT limits.
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