Top 5 Things that Create AMT Tax Liability

The Alternative Minimum Tax (AMT Tax) was created in order to prevent individuals with extreme wealth from paying too little through creative income and deduction modeling. With the standard tax code, many wealthy individuals can find a way to defer payment, deduct expenses and otherwise reduce their liability. If they succeed in doing so, they can only reduce it to a certain level, and then they will face AMT liability. Techniques that can result in paying the AMT include:

#1 Personal Exemptions

Personal exemptions do not apply when calculating AMT. The more exemptions you claim on your standard tax forms, the more difference you are creating between your AMT and your standard payment. It is very rare that exemptions alone would generate AMT liability. However, when combined with other items, exemptions can be a contributing factor.

#2 Taking the Standard Deduction

Wealthy individuals are more likely to itemize deductions than take the standard tax deduction. Most Americans, though, do claim the standard deduction, which is not allowable in calculating the AMT. The AMT is more likely to apply to a wealthy person, so this factor rarely comes into play. However, a middle-income individual with a number of exemptions and additional investment income may be exposed to AMT liability if he or she takes the standard deduction.

#3 State and Local Taxes

Taking an itemized deduction on state and local taxes means you can deduct items like property tax, income tax and sales tax. This works well in reducing your tax liability on the standard form, but none of these items can be deducted on the AMT. Whenever you claim a deduction on your standard tax that is not allowable on the AMT, you are putting yourself at risk of potential AMT liability.

#4 Interest on a Second Mortgage

You may take a loan to buy, build or improve your home during any tax year and deduct the interest on the loan. However, the second you take a loan against your home for another purpose, the interest is no longer tax deductible. So, if you take a second mortgage in order to finance a college education, the interest on the mortgage is not deductible. This additionally only applies to primary properties. Loans taken to purchase or improve a secondary property are not deductible on the AMT. It is more likely that wealthy individuals, who are already at risk of exposure to AMT liability, will face these issues.

#5 Stock Options & Payments

Additional income acquired through incentivized stock options does not need to be reported on your regular taxes. However, it must be reported on your AMT calculation. Unless you turn and sell the stock immediately in the year you exercise your option, you will be on the hook to report the gain on your AMT. This will almost always results in an AMT payment in a given year; the size of most stock option gains is extremely high. The same can be true of a large capital gain, which can expose you to AMT by reducing the AMT exemption. Any time you have a large investment payout in a given year, pay attention to your AMT exposure.

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