Congress created the federal alternative minimum tax (AMT) to ensure that wealthy individuals and corporate taxpayers pay their fair share of federal income taxes. The AMT has its own set of forms, rates, rules, and brackets and requires taxpayers to calculate their federal income tax using this alternative tax system.
Who's Vulnerable—and Why?
If you have heard about the AMT and thought it couldn't possibly apply to you, you may be surprised to learn that ordinary taxpayers may be subject to it. Examples of some of the more common AMT triggers are substantial deductions claimed for (1) state income taxes, (2) dependent exemptions, (3) and interest on home equity loans used for purposes other than home improvement. What do these items have in common? Each has the potential to be disallowed or treated differently under the AMT system than it would be under the normal ordinary income tax system.
Earning significant interest income (usually tax-exempt) from certain private-activity municipal bonds or exercising incentive stock options that are "deep in the money" (on which gain is usually deferrable and taxed as capital gain income) can also trigger AMT.
You Pay the Higher Amount Calculated
How do you know if you are likely to be subject to the AMT? Since there are no specific tests to determine in advance whether you may have AMT exposure, in many cases you should calculate what you might owe under the ordinary tax system and compare that to what you might owe under the AMT. If your AMT tax bill is higher, that's the tax you will owe. If you are subject to the AMT, you will likely need to file at least one special tax form–Form 6251–and maybe others, depending on the nature of your income and deductions.
Planning Can Help
If you were subject to the AMT in 2007 or you think you could be subject to the AMT in the years ahead, there are things you can do to help minimize its impact. Start your plan now by using the TaxCaster tool on Fidelity.com may help you estimate your potential tax liability under both the regular federal income tax system and the federal AMT system.
