To: Alex Lee
Date: September 23, 2012
Subject: Alternative Minimum Tax
In 1969, Congress had noticed that 155 people with high incomes were legally using so many deductions and other tax breaks that they were virtually paying nothing in federal income taxes. This angered many tax paying citizens and embarrassed the government. In an effort to fix the system Congress came up with the alternative minimum tax. At the time the tax only affected the high income class but not so today. The alternative minimum tax was never adjusted for inflation and now affects more and more middle income taxpayers. Now a day the AMT affects people with an income over $75,000 and some large deductions. Most vulnerable are taxpayers with several children, interest deductions due to second mortgage, capital gains, and incentive stock options.
The question I know you may be having is if you will be subject to the alternative minimum tax. A simple way to see if you are subject to paying AMT or how close you are to paying it. We can look at your Form 6251 from last year. We can compare the tentative minimum tax to your regular tax. Your change in income can leave you with an AMT liability. It could be because of a big item on your tax return or a lot of small items that would make you pay AMT. One of the best ways to understand the alternative minimum tax it to look at it as a separate tax system. This system has its own set of tax rates and its own rules for deductions. Let me explain how the AMT works. The AMT is reduced by an exemption amount to arrive at net alternative minimum taxable income. This income is then multiplied by 26% or 28% alternative minimum tax rate. If your income was to exceed $175,000 it will be subject the 28%. The first alternative minimum tax income of $175,000 will be subject to 26% tax rate. These rates are for individual returns. Corporations figure their tax under the regular system, which taxes...