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5/18/2023 AMT ExplainedAlternative Minimum Tax (AMT) is a complicated topic in the tax world. While few taxpayers are snagged by AMT these days, due to recent adjustments in the trigger amounts, it still pays for you to understand certain specifics… What is AMT?
Your tax return generally contains two calculations: regular taxes, and AMT, which is often completed in the background with your tax return preparation. You then pay taxes based on the higher resulting tax figure of the two calculations. Most often the regular taxes exceed the AMT calculation, making AMT irrelevant. For example, if you owe regular taxes of $10,000 and the AMT calculation shows $9,200, you’d pay the $10,000 regular taxes and AMT wouldn’t be in effect. However, if you’re AMT is $12,000 and your regular taxes are $10,000, you’d see an added AMT line item on your regular tax return making your taxes due equate to the $12,000 figure. When does AMT generally apply? There are certain “preferential” items that get people snagged into AMT. In other words, some items that are deductible on the regular tax return (i.e. – property taxes), do not get a deduction in the AMT calculation. Other items, like Incentive Stock Option (ISO) exercises, can add income into the AMT calculation that otherwise isn’t includable in the regular tax computation. In this case, the bargain received upon ISO exercise (fair market value minus exercise price paid) is added into AMT income. For those employed with start-up companies, this can be a common occurrence as stock options are a common incentive for these employees. Therefore, these folks need to carefully consider the tax implications of their ISO transactions. How can you avoid AMT? The AMT calculation does allow some margin with the income calculation where the exercise of ISO’s does not automatically trigger AMT tax. With the help of your tax preparer, you can calculate the amount of ISO exercise income allowable while still keeping you out of AMT. You can also sell ISO’s in the same year you exercise them, which eliminates that exercise from counting in the AMT calculation. Can you get AMT taxes back? Yes, AMT taxes are essentially prepaid taxes that accumulate as credits and are applied against regular taxes in future years when AMT doesn’t apply. In our previous example where you had $10,000 regular taxes and a $12,000 AMT, you would pay $12,000 in taxes and have a $2,000 AMT credit to be applied in a future allowable year. Let’s say you then have $9,200 AMT in the following tax year and $10,000 regular tax, you would pay just $9,200 in taxes, as you’d use up $800 of your $2,000 AMT credits. Generally larger AMT credits are mostly used in the years the stock is sold that generated the original AMT tax upon exercise. We hope this helps with your understanding of the mysterious Alternative Minimum Tax! Comments are closed.
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