Alternative Minimum Tax (AMT): Who Should Watch Out

In general, the higher his/her income level, the greater a taxpayer's chance of being hit with the AMT. In general, those earning in excess of $200,000 up to $1,000,000 are the most likely to be hit.

Besides income, there are several other factors that may increase your chance of being hit by the AMT. The AMT is essentially an alternate set of rules for figuring federal income tax, and many of the common deductions taken under the traditional rules are disallowed under the AMT rules. Essentially, a high-income earner's taxes are supposed to be figured by both the traditional rules and the AMT rules, with the higher number prevailing as the amount the taxpayer owes. If the IRS sees a large number of deductions taken in an area that is disallowed by the AMT, it is more likely the AMT will be levied, as it will cause the amount of taxes due to be higher. Here are a few of the things that may trigger the AMT.

• Exemptions. The more exemptions you claim, the greater your chance of triggering the AMT. Why? Because exemptions for yourself, spouse and dependents are not allowed under the AMT.



• State and Local Taxes. If you live in a place where state and local taxes are high, and therefore also are the deductions you claim for them, your chances of paying the AMT increase. Why? Because deductions for state and local taxes are not allowed under the AMT.



• Interest on Second Mortgages. If you borrowed against your home for any purpose other than to buy it, build it or improve it, you may be subject to the AMT. Why, because under the AMT, deductions of mortgage interest for anything other than these purposes is not allowed.



• Medical Expenses. If you claim an itemized deduction for medical expenses, you stand a greater chance of paying the AMT. Although the AMT does allow for some medical expense deductions, the rules are more limited than those that apply to regular income tax.



• Miscellaneous Itemized Deductions. There are certain items that can typically be deducted on a tax return providing they account for over 2 percent of a taxpayer's adjusted gross income. These items include un-reimbursed employee expenses, tax preparation fees and expenses related to personal investments. These itemized deductions are not allowed under the AMT and therefore increase an individual's chances of paying the AMT if claimed.



• Long-Term Capital Gains. Typically, a long-term capital gain is treated the same way under the AMT as under the regular income tax system. However, if an individual has a large capital gain in one year, his/her income may exceed what it normally would, putting him/her in a higher income bracket and therefore rendering useless the AMT exemption amount, which can only be claimed below a certain income level.