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I am looking for a simplistic understanding of AMT. I had thought that it was, (again simplistically,) a way to make sure that your deductions were not excessive wrt your income.

We got hit with AMT this year for the first time. It was a fabulous year income wise, with the start up DH works for basically giving him a 150% bonus. Some surprises can be nice.

So while we made 2.5 times last years return's income, our deductions did not change hardly at all, and are the very basic deductions for kids, taxes paid, and primary residence taxes and mortgage interest. The one rather insignificant change was for $1,000 real estate taxes for a vacation home we bought last year. But the AMT worksheet shows us owing an extra $7,000 over the regular filing.

What am I missing in my misunderstanding of AMT, or did DH potentially screw up somewhere in the TurboTax filing??

not complaining, just looking to understand
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Amendment: the amount we deducted for state taxes of course went up quite a bit too, since income was higher, but PA's tax rate is only around 3%.


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May have found my own answer:

The following items may trigger an AMT liability:

Itemized deductions for state and local taxes, medical expenses, and miscellaneous expenses
Mortgage interest on home equity debt
Accelerated depreciation
Exercising (but not selling) incentive stock options
Tax-exempt interest from private activity bonds
Passive income or losses
Net operating loss deduction
Foreign tax credits
Investment expenses

Looks as though state taxes and the additional property tax for the second home is what did us in. Weird though, as state taxes certainly go up with income. Eh, I gave up expecting taxes to be logical a while ago.

not expecting a repeat issue with AMT next year, but not seeing how to avoid it either
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AMT is really a parallel tax system. It has it's own rules regarding what is income and what is deductible.

For the most part, what is income is the same between regular tax and AMT. Incentive Stock Options are one of the bigger differences in terms of income.

It's the deductions where things get different. For individuals, it's mainly itemized deductions that are different.

Medical expenses have to be reduced by 10% of AGI rather than 7.5% in the regular tax. (Although this one is going away in 2013 as most people will get a 10% of AGI haircut for regular taxes.)

Most taxes are not deductible, including state and local income tax, sales tax, and property taxes.

Most miscellaneous itemized deductions are not allowed for AMT. That can hit employee business expenses pretty hard.

Plus the personal exemptions are not allowed, nor is the regular tax standard deduction.

In place of these deductions, AMT substitutes it's own AMT exemption. However, that exemption starts phasing out at a relatively low income, so that by the time some other items are factored in, most people paying AMT will already have their AMT exemption reduced to some extent.

In my practice, I generally see AMT start coming into play at something around $180k of income for a couple, and closer to $100k for a single person. But that's in CA, with its fairly high income tax rate. In lower tax states, it can take closer to $225k of income for a couple.

As you discovered, state taxes are often one item that will trigger AMT. The rate itself doesn't have to be that high, just the absolute dollars.

Another strange trigger is very large capital gains. While AMT uses the same tax rate for capital gains as the regular tax, all of that gain can cause the other (non-capital gain) income to be taxed at the AMT rate rather than the regular tax rates.

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Thanks Peter. That helps.

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I found this calculator this morning. It was very helpful for comparison purposes for me.

I'm very concerned about triggering AMT, since I live in NJ and my deductions are state income tax, property tax, charitable contributions, and mortgage interest (roughly in order of significance, actually).

So if something's going to trigger AMT for me, it's going to be state and property taxes. I could find a billion things that said "calculate if you'll owe or not" but NOTHING on how close to the edge I was or what the consequences would have been had the patch not been put into place.

The calculator at least helped me model somewhat. Does anyone know of another one?

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We played with the worksheet on Turbo Tax. We played around with income and deductions to see how close to the edge we are. Looks as though we might as well get used to paying AMT.

doing our best not to move to NJ
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