This is taken from the turbo tax website.
Alternative Minimum Tax: Common Questions
Updated for Tax Year: 2010 The Alternative Minimum Tax (AMT) was designed to keep wealthy taxpayers from using loopholes to avoid paying taxes. But because it's not automatically updated for inflation, more middle-class taxpayers are getting hit with the AMT. Although Congress implemented a patch for 2009, it has not yet done so for 2010. These FAQs can help you decide if you are still at risk of falling under the AMT.
AMT Concerns Growing
Each year, more and more taxpayers discover, to their dismay, that they are subject to the Alternative Minimum Tax (AMT), which knocks out a lot of exemptions, deductions and credits they may have benefited from when doing their regular income taxes. Here are the answers to some common questions about the dreaded AMT, starting with information about a recent change that protects an estimated 21 million taxpayers from falling victim to the AMT when they file their 2010 returns.
How did Congress change the Alternative Minimum Tax for 2010 and 2011?
Why does the AMT exist?
What is the Alternative Minimum Tax?
Why are middle-class folks being hit with the AMT?
Why would I have to pay the AMT?
How can I avoid the AMT?
What happens to my tax credits?
How can I plan ahead for the AMT?
How did Congress change the AMT for 2010 and 2011?
As part of the 2010 Tax Relief Act, Congress revised the exemption amounts used in making AMT computations for 2010 and 2011. The AMT exemption is basically a standard deduction for taxpayers hit by the alternative minimum tax.
Without the revised exemptions, an estimated 21 million taxpayers would have fallen into the grasp of the AMT—boosting their tax bills by an average of more than $6,000 each. As a group, the taxpayers would have paid an extra $136 billion in taxes.
The patch that was approved by Congress and signed into law by President Obama, prevents that from happening.
Under the new law, the 2010 exemption amounts are:
Single taxpayers: $47,450
Married taxpayers filing jointly: $72,450
Married filing separately: $36,225
Head of Household: $47,450
For 2011, the exemption amounts are:
Single taxpayers: $48,450
Married taxpayers filing jointly: $74,450
Married filing separately: $37,225
Head of Household: $48,450
Why does the AMT exist?
In 1969, Congress noticed that 155 people with high incomes were legally using so many deductions and other tax breaks that they were paying absolutely nothing in federal income taxes. Their nonexistent tax bills were an embarrassment.
So Congress instituted the AMT with the aim of making the tax system fairer. But because the AMT was never indexed to inflation—as the regular income tax is—each year, more and more middle-income taxpayers are snared by a tax originally targeted at the rich.
The annual "patch" is Congress’s attempt to slow down the expansion of the AMT to taxpayers to whom it was never intended to apply.
What is the Alternative Minimum Tax?
The AMT is a parallel tax system that operates in the shadow of the regular tax, expanding the amount of income that is taxed by adding items that are tax-free under the regular tax system and disallowing many deductions.
To figure out whether you owe any additional tax under the Alternative Minimum Tax system, you need to fill out Form 6251.
If the tax calculated on Form 6251 is higher than that calculated on your regular tax return, you have to pay the difference as AMT. It can result in you paying hundreds or even thousands of dollars in additional taxes.
Why are middle-class folks being hit with the AMT?
In 1987, one year after the last major overhaul of the Alternative Minimum Tax system, only one tenth of one percent of all returns had to pay the Alternative Minimum Tax.
Today, the Alternative Minimum Tax is no longer just for high-income individuals. Now, many middle-income Americans are paying the Alternative Minimum Tax or having their tax credits limited by its hidden effects.
The Treasury Department expects that more and more people will be paying the AMT over the next few years.
Read more here
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