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How
to Get Out of the Clutches of AMT
By
Chintamani Abhyankar
Alternative Minimum Tax (AMT) is meant for
catching people who avoid paying taxes claiming extensive tax breaks. The
number of people affected by AMT is estimated at 25 million. Under the
provisions of AMT, if your income goes above a threshold, then there is a
cap on the deductions available to you and you end up paying more taxes.
Look at the following reasons which trigger your AMT liability:
- The exemptions you claim - If you claim more and more tax exemptions
for yourself and your spouse as well as your dependents, you are likely
to get AMT liability.
- The standard deduction - More than 70 per cent of the Americans
prefer to claim the standard deduction rather than to go for itemizing.
This deduction can contribute to AMT liability because the standard
deduction is not allowed under AMT
- State and local taxes - If you are claiming deductions for state
taxes and local taxes, these deductions are not allowed under AMT. So if
you reside in a place where the state and local taxes are higher, then
it is likely that you will be subject to AMT.
- Interest on second mortgages - AMT does allow a deduction towards
interest on mortgages used to buy or a build your home. However if you
take loan against your home for any other purpose, such interest is not
allowed as a deduction under AMT.
- Medical expenses - AMT does allow for a deduction of medical
expenses. However such a deduction is more restrictive than the one
under the regular income tax. If you happen to claim a deduction for
medical expenses as an itemized deduction, it is likely that part of it
or all of it may be disallowed when you calculate your tax with AMT.
- Miscellaneous deductions - Certain deductions are available under
normal income tax provisions if the total deductions make up more than
two per cent of your adjusted gross income (AGI). These deductions
include un-reimbursed expenses from the employer, fees paid towards
preparation of your tax return, and expenses relating to investments. If
you claim a large amount of deduction in this category, that can lead to
trigger your liability to pay AMT.
- Intensive stock options - when you exercise an intensive stock
option, you need not report that on your regular income tax return.
However, it is bound to trigger your liability to pay AMT. The only
solution is you should sell the stock during the same year!
- Long-term capital gains - If you have a large capital gain, it is
possible to get stuck with the liability of AMT. This is because a huge
capital gain will reduce the AMT exemption amount.
- Exempt interest - Some types of interests which are exempt from
income tax may or may not be exempt from the AMT liability. This is
because of many complicated rules on interest on bonds. If your
investment in bonds is not exempt under the AMT, it may lead to AMT
liability for you. Even a lot of mutual funds invest in bonds which are
not exempt under the AMT. If you receive interest from such funds, you
may attract AMT liability.
- Use of tax shelters - There are still some tax shelters available
like investing in specific types of partnerships or limited liability
companies involving activities like oil and gas drilling. Under AMT
provisions the tax benefits are reduced for these activities. You should
always check the AMT consequences before investing in such ventures.
To sum up, you should keep in mind these important causes while making
your financial decisions. Neglecting them will end up in paying higher
taxes.
Chintamani Abhyankar is internet marketer, tax professional and
freelance writer. He has done a lot of research on tax systems and is
advising people internationally on various aspects of tax planning over
last 25 years.
His masterpiece,
Stop donating your money to IRS is an e-book on the tax secrets which
only lucky people knew in the past. His easy to implement strategies can
put thousands of dollars in your pocket. Grab a copy now!
Article Source:
http://EzineArticles.com/?expert=Chintamani_Abhyankar
http://EzineArticles.com/?How-to-Get-Out-of-the-Clutches-of-AMT&id=1980137
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