Just when you think you’ve got the tax loopholes figured out…here comes another tax wrinkle. It’s called Alternative Minimum Tax (AMT for short) and it’s estimated that 10 million more Americans will fall prey to it this year.
AMT is the single biggest issue facing American taxpayer this year. It’s especially a problem if you’re a real estate investor, selling an asset and hoping for capital gains tax rate, make more than $75,000 per year or have a lot of itemized deductions.
AMT is basically an alternative form of calculating tax. You end up paying tax based on whichever is more: regular income tax or AMT.
The same tax formula you’ve always used applies:
Income (Deduction) = Taxable Income * Tax Rate = Tax
The difference is that the definitions are different for each step.
AMT Income = Income reported for regular income tax + Incentive Stock Options + Gain from sale of Qualified Small Stock + Private Activity Bond Interest
Note: Passive activity losses can not be used against other income. Losses are added back in for AMT Income calculation.
AMT Deductions = Deductions for regular income tax Except for: Accelerated Depreciation Long Term Contract calculation Circulation, Research, Exploration Credits Mining Exploration & Development Pollution Control Some Charitable Contributions Percent. Depl. Intangible Drilling Costs Misc. Itemized Deductions Some Medical Expenses Some Mortgage Interest Fuel Credit
AMT Rate = 26% to 28%
So, how does this apply to you? AMT means that you might suddenly get hit with 28% federal tax rate on your long-term capital gains. It means that you may not get the depreciation deduction you thought you were going to. It also means that you can not take your real estate losses against your other income, with no exceptions. (In other words, the real estate professional loophole isn’t going to help you for AMT.)
Think it won’t happen to you? Think again. There are 10 million more American taxpayers that are going to be hit with this tax this year.
I am working on a new series of AMT Loopholes. I should have that written by the end of September.
Meanwhile, check with your CPA to see if AMT is an issue for you. Or you can go to the IRS website and download the AMT worksheet to go through yourself (plan on setting aside a day and have a bottle of aspirin handy if you try to do-it-yourself on this one).
Learn More at Diane Kennedy Tax Loopholes