What is the AMT?
Rather than showing themselves to be an ally to the middle class by ending the AMT or repealing it for years to come, my Republican colleagues refused to include it in today's legislation and America's middle class will surely suffer that choice greatly.
No, it is not a dyslexic version of ATM!
Back when people could shelter almost 100% of their high income, Congress decided to make that more difficult by creating the alternative minimum tax (“AMT”). This and other changes have made it difficult for the top 1% of taxpayers, people with income over $1 million, to go much below an average tax of 20%. But, an AMT rate as high as 28% is still great if your marginal rate is 39%.
However, the AMT is sometimes called the "stealth tax" because it now affects many less wealthy taxpayers!
Why do you care? Despite the title, you do not get to pick
You must pay the higher amount determined by the regular and AMT tax calculations. If you have to pay the AMT, you are paying almost a flat rate of 26% but it can be 28%, and you are losing the value of certain deductions, including state income taxes paid, certain mortgage interest and miscellaneous deductions, and having “preference” amounts added to AMT income, including incentive stock options and alternate depreciation schedules. Data on 2012 income tax indicates that nearly every married taxpayer with income between $100,000 and $500,000 owed some AMT.
So what do you do? Plan carefully
Make sure that efforts to reduce regular taxes do not push you into paying the AMT. Here is one example: If you have a year with high ordinary income, you should pay your state income taxes during that calendar year, since you are less likely to be in the AMT, rather than waiting to pay in April of the next year, where a lower ordinary income means that you will certainly be in the AMT.
(Note: some states impose an AMT as well.)
Good planning pays off
As in the example above, where preserving the deduction can be a very substantial savings on your federal income taxes.