The Alternative Minimum Tax (AMT) was developed in the 1960’s as a “parallel tax” that attempted to gain back tax revenue the government “lost” to investors utilizing tax breaks (Uncle Sam wants to ensure everyone pays their fair share).
The AMT recalculates income tax after adding certain tax preference items back into adjusted gross income. Some investments can trigger the AMT and it's important to plan with your financial professional so you’re not surprised at tax time.
Here are a few things that can trigger the AMT and increase your tax bill:
1. High Household Income
Congratulations on being a high earner! Uncle Sam would like to talk to you now. If your household income is over a predetermined phase-out threshold, and even if you have a significant amount of itemized deductions, the AMT can affect you.
2. Large Capital Gains
Long-term gains (when you sell a home or other investments for a profit) are taxed at the same rate under both systems, but capital gains could put you over the AMT exemption threshold. This could mean that the AMT will take effect, and you may not be able to deduct state income taxes you paid.
3. Exercising stock options
Exercising qualified employee stock options (incentive stock options or ISOs) to purchase stock at a discounted price is normally not a taxable event until you sell the shares for a profit. However, the AMT creates a paper profit that’s taxable even though it’s not a real profit until you sell the shares.