How the AMT Can Affect You

If you fall into the AMT trap, your tax bill could be higher, perhaps thousands of dollars higher, than it would be without the AMT.

Here are just some of the ways your tax bill could go up if you fall in the AMT trap:

• You could lose deductions for state and local taxes paid.
• You could lose the personal exemptions for yourself, your spouse—if you are married—and each of your children. For 2008, the personal exemption is $3,500; In 2009 it has increased to $3,650. Thus, a married couple with three dependent children could lose $17,500 in exemptions in 2008 and $18,250 in 2009.
• If you don't itemize your deductions, you could lose the ability to claim the standard deduction. For 2008, that means a loss of $10,900; for married couples filing jointly and $5,450 for single taxpayers. For 2009 the standard deductions are $11,400 for joint filers and $5,700 for singles.
• Qualified dividends and long-term capital gains are taxed at federal rates no higher than 15% for purposes of both the ordinary income and alternative minimum taxes. However, the extra income could accelerate or even wipe out the amount of income you can exempt from the AMT. The AMT exemption amounts for tax year 2008 are $69,950 for married joint filers, $46,200 for unmarried individuals and $34,975 for individuals filing separately. The AMT exemption amounts for tax year 2009 will be $70,950 for married joint filers and $46,700 for unmarried individuals. But these exemptions are subject to phase out based on income.
• Normally, if you exercise incentive stock options (ISOs) and decide to hold the stock for at least two years after the options are granted and one year after the stock is acquired upon exercise and you meet certain other requirements, you may be able to defer tax on the capital gain until you sell. However, if you are subject to the AMT, alternative minimum taxable income is usually increased in the amount by which the fair market value of the stock at time of exercise exceeds the option exercise price.
• In addition to losing deductions under the AMT, you may gain a source of taxable income: If you are subject to the AMT, you'll have to include interest from certain tax-exempt private-activity bonds as part of your alternative minimum taxable income. These bonds pay for such things as certain types of housing projects, airports, and industrial parks.
• If you used a home-equity loan for anything other than home improvements, you may lose the deduction for the interest paid on the loan.
• The AMT only allows you to deduct medical expenses in excess of 10% of AGI, instead of the conventional 7.5%. With the AMT, you add the 2.5% difference back to your income.