This may come as a surprise, but it's not the rich who have to worry the most about having to pay the reviled alternative minimum tax, or AMT. Some 3.9 million taxpayers — 4.2 percent of the nation's total — are expected to get hit with it for 2013, according to experts from the Tax Policy Center. The average tab for individuals: $6,600.
"Unfortunately, AMT is really targeted at the middle market," said Dave McKelvey, partner in Friedman LLP, a New York City accounting and advising firm. "If you make a lot of money, your regular tax is going to be high enough that AMT is not going to be an issue, and if you make an income that's low enough, AMT is not going to be an issue."
Under the dual tax system, taxpayers must pay whichever is higher — regular income tax or AMT — a rule established in 1969 to make sure no one escaped tax entirely. The AMT does not permit many of the deductions available for the regular return, such as personal exemptions, standard deductions and deductions for state and local taxes paid.
So how do you know if you'll face AMT this year? Past experience may be a better guide this January than it's been in the past.
That's because the compromise that ended the "fiscal cliff" showdown early in 2013 ended the annual uncertainty about the income levels exempt from AMT. Now the thresholds are automatically adjusted each year for inflation. The full exemption applies to an adjusted gross income of $80,800 for a couple filing a joint return, $51,900 for singles. The exemption phases out as income rises.
That leaves the upper middle class to face the tax, especially those with incomes between $200,000 and $500,000, said Mark Luscombe, principal federal tax analyst for CCH, a Wolters Kluwer business that studies tax issues.
Certain factors raise the AMT risk. The seven triggers are:
1. living where there are high state and local taxes, which produce big deductions on the regular return
2. exercising stock options
3. reporting large investment options
4. having lots of children
5. using a home-equity loan for something other than home improvement
6. having a pile of miscellaneous deductions
7. claiming business depreciation
For strategies on how to avoid the AMT in the future, read more here.