The alternative minimum tax or AMT is more than a mere tax: It disallows or reduces exemptions and deductions that would otherwise work to your benefit. Forbes calls it the normal tax system’s evil twin.
You may think your children entitle you to exemptions or that your property taxes will earn you a deduction; however, AMT could have a whopping tax bill knocking at your door.
The calculation happens behind the scenes — either at your accountant’s office or behind the screen if you couple that with tax software. Unfortunately, you may not even know what hit you.
What happens is that your tax liability is determined both with and without the AMT, and you will pay whichever amount is higher. Taxpayers with incomes between $200,000 and $500,000 appear to be the most vulnerable.
AMT was created in 1969 to ensure that very wealthy taxpayers pay their fair share, but now AMT ensnares millions of upper-middle-class Americans. Though tax experts and elected officials decry the irony of AMT, it lives on. And why? You guessed it — because it brings in so much revenue: close to $30 billion in 2015, according to the Tax Policy Center.
Can you lessen AMT’s impact? Try these suggestions:
Remember that withdrawals from a Roth are tax-free and a Roth isn’t subject to the government’s required minimum distributions once you reach age 70 1/2, so if you don’t need the money, you can pass it along to your heirs.
The AMT is complex and rules may change, so be sure to speak with a qualified professional before making a decision.