No One Understands AMT

Have you ever been asked to explain any of these things?

•  The Holy Trinity
•  The Tooth Fairy
•  Why you only ever see one shoe on the side of the road, and never two?
•  How your Aunt Dottie is always drunk, no matter what time of day it is, and you never see her drink anything?

If you've ever been asked to explain the Alternative Minimum Tax (AMT) to someone, you see what I’m getting at. I would have an easier time explaining the benefits of waxing to a bear.

When a client is all of a sudden subject to the AMT for the first time, their eyebrows go up and their mouth begins to form the words “What the hell…”. I can see it coming…that incredulous tone bordering on defensive that signals I have some explaining to do and quick. As though I handed them a tax return prepared in Latin and have asked them to recite it an audience.  And I don’t blame them. AMT is difficult to understand, and difficult to explain.

So, what is the AMT?

The present AMT was enacted in 1982 (thanks, President Reagan).  Like all magical alternate universes, it wasn’t necessarily created for evil.  But, in order to understand AMT, you must visit the alternate universe much like an alien.  This universe requires you to suspend what you know about regular income taxes and calculate a different tax, an alternative tax, one where some deductions are allowed and some aren't; where you make money and pay taxes, but like the portkey in Harry Potter, a seeming ordinary and innocuous event transports you to a magical and alternate universe, where you could owe more tax. In the regular universe, there are deductions that one can take.  In the AMT universe, where Voldemort and IRS live, some of those deductions vanish.  POOF!

The two common disallowed deductions that impact our clients when assessing taxes in the land of AMT are:

•  state income taxes paid

•  miscellaneous itemized deductions.  

For regular universe income taxes, these are great deductions. In the land of AMT, they don’t exist. So, when you add those deductions back to your taxable income, along with other required calculations (remember that portkey), turn your head to the left and spit in the air, then assess the flat tax rate of 26% or 28%, if your tax under AMT is higher you must pay it. If not, then you pay your regular income tax. 

But, how did I get to the land of AMT?
Most people are under the assumption that if they make a lot of money, they will be subject to AMT. Not true. It’s funny that AMT was created to level the playing field between the higher income earners and average income earners, but it only succeeded (in my opinion) in subjecting more average income earners to a higher level of tax. As with every road that Congress paves, hell was involved, as were good intentions. So, income is only a small part of how you end up in the land of AMT. 
You don't find AMT. You don't plan a vacation to AMT. You end up there, like that bar you end up visiting at 1am. A series of situations occurred that lead to AMT. 

The AMT form instructions are 14 pages long. FOURTEEN PAGES OF IRS-SPEAK. Harry Potter is 7 books, and it is far easier to explain. This blog post wasn't intended to tell you how to avoid AMT. It's tricky, it is everywhere and nowhere at the same time. It wasn't even a good attempt at explaining AMT.
This blog post was written to increase your awareness of AMT, and also let you know that we can meet to discuss if and how AMT impacts you.

So, bring your abacus, your Latin-to-English dictionary, and a shot glass and we’ll discuss it further. Try to avoid portkeys on your way.