Oh the dreaded AMT! The alternative minimum tax was designed to prevent wealthy taxpayers from using loopholes to avoid paying their fair share of tax. But it has extended its claws down to many middle-income taxpayers, as well—much to their dismay.
The AMT is an alternative calculation of one’s tax bill that basically disallows many deductions, including state and local tax, childcare credits and property taxes. When you do your taxes, you are required to also determine your AMT (if you use software, the program does this for you). You pay whichever amount is higher. The people most likely to be stuck paying AMT are those with large state and local and real estate tax deductions, more than four dependents, and profits from stock options, to name a few common culprits.
Avoiding the AMT monster is tough. If you’ve been hit by it in the past—and are therefore likely to be hit again—consider upping your contributions to your qualified retirement accounts, like IRAs and 401(k)s. There’s a chance this could lower your adjusted-gross income enough to avoid the higher tax. (You can make IRA contributions until April 15 of the following year.) Careful planning throughout the year is also important. At the very least, you can try to minimize the damage by deferring certain deductible expenses (such as property taxes or state taxes) to the following year.