Alternative Minimum Tax (AMT)
The Alternative Minimum Tax (AMT) was designed to ensure that those who are eligible for special tax deductions and credits still pay a minimum amount of taxes to the government. The original intent was to prevent the wealthy from paying little in taxes because of special tax breaks or credits.
It essentially runs parallel to regular income taxes. AMT is figured separately because it eliminates many deductions and credits, which increases tax liability for someone who would otherwise pay less tax. To determine whether you should pay AMT or regular income taxes, you need to calculate both taxes and then pay whichever is higher.
Basically, the way the calculations are set up, the more exemptions and deductions you normally claim, the more likely it is that you'll be liable for paying AMT.
AMT is important for investors to understand because if you had large capital gains in a given year, you have a greater chance of having to pay AMT.
The IRS has a helpful AMT Assistant Tool that will help you determine whether you are subject to AMT this year. If you are not responsible for paying AMT this year but you have paid it in past years, you may be eligible for a tax credit against your taxes this year.
AMT & Your Investments
Some investments, including some bonds and exempt interest dividend paying mutual funds, are subject to the AMT if you are responsible for paying the AMT in a given year. These investments have underlying assets consisting of a private activity bond. If you currently hold one of these investments, you will receive a 1099-INT form with income reported in the Specified Private Activity Bond Interest area.
Scottrade does not provide tax advice. The material provided in this article is for informational purposes only and Scottrade is not responsible for any errors or omissions. Contribution and income limits are subject to change without notice. Please consult your tax or legal advisor(s) for questions concerning your personal tax or financial situation.