How the Alternative Minimum Tax Works

How to Avoid the AMT

Sit down for a minute with Form 6251, the Alternative Minimum Tax form from the Internal Revenue Service (IRS). For such a short document, it really packs in the confusion. One of the reasons that so many taxpayers are blindsided by the AMT is because the law is so ridiculously complicated. Only a certified public accountant can make sense of the 27 lines dedicated to the various types of income that are taxable under the AMT. This is why we recommend getting the advice of a good CPA if you think your financial situation may be wandering into AMT territory.

What are some warning signs that the AMT is imminent? If you make more than $75,000 a year, there is cause for concern. If you make more than $100,000, you might as well buy a red flag and wave it in the air. Other reasons to worry are if you own a business, own rental properties, own S-corporation stock or have exercised incentive stock options [source: Bischoff].

As confusing as Form 6251 is, it does serve a purpose. If you or your accountants fill in all of the information dutifully, you'll arrive with a number on line 33 called your "tentative minimum tax." This number becomes the Alternative Minimum Tax if -- and only if -- it is greater than line 35, which is the tax you owe from the regular Form 1040. As long as line 33 is less than line 34, you're in the clear. But this is a great way to find out how close you are to the AMT and to take aggressive measures to avoid it.

Since family size and marital status are two big contributors to the AMT, your hands are somewhat tied (unless your spouse considers higher taxes grounds for divorce). But there are a few things you can do to lower your exposure to the AMT:

  • Move to a state with lower taxes
  • Don't spend a home equity loan on anything other than your house
  • If you accrue a lot of unreimbursed business expenses from your job, ask your boss to lower your salary but increase your expense account
  • Be careful when exercising stock options. Talk to your CPA about tips to minimize your tax exposure [sources: TurboTax and Todorova]

For lots more information and tips on avoiding tax troubles, explore the related links on the next page.