Alternative Minimum Tax

The Alternative Minimum Tax was created by Congress to prevent people from using loopholes to avoid paying taxes.  The way your AMT is calculated is similar to the way your regular tax is calculated except a lot of the deductions that you were able to take for regular tax are no longer allowed.  If your AMT turns out to be higher than your regular tax, you will have to include the difference on Line 45 of your 1040.

Most of us millennials will not have to worry about paying AMT unless we’ve reduced our taxes by taking a lot of itemized deductions (mainly in real estate or property taxes).  But the only way to know whether you have to pay AMT or not for sure is to fill out Form 6251.

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Taxable Income & Tax Rate Schedule

After you figure out what’s included in your Gross Income (Line 22 of your 1040),

and then subtract certain expenses to get your Adjusted Gross Income (Line 37),

and then subtract your Standard or Itemized Deductions from your AGI (Line 41),

you subtract from Line 41 your exemptions (Line 42) to get to your Taxable Income (Line 43).  Your Taxable Income is used with the Tax Rate Schedule to figure out how much Tax you need to pay that year (Line 44).  See below for a calculation example.

Here is the 2013 Tax Rate Schedule for someone filing Single on their tax return:

If taxable income is over—
but not over—
the tax is:
$0
$8,925
10% of the amount over $0
$8,926
$36,250
$892.50 plus 15% of the amount over $8,925
$36,251
$87,850
$4,991.25 plus 25% of the amount over $36,250
$87,851
$183,250
$17,891.25 plus 28% of the amount over $87,850
$183,251
$398,350
$44,603.25 plus 33% of the amount over $183,250
$398,351
$400,000
$115,586.25 plus 35% of the amount over $398,350
$400,001
no limit
$116,163.75 plus 39.6% of the amount over $400,000

Pretend your Taxable Income (Line 43 of your 1040) is $50,000.  Your marginal tax rate is 25% because your Taxable Income is between $36,251 $87,850.

To calculate how much Tax you need to pay, take $4,991.25 + [25% x ($50,000 $36,250)] = $8,428.75 (this amount will be reported on Line 44).

I suggest testing this calculation out yourself using your 2012 Tax Return.  See if you can get to the same number that was reported on Line 44 of your 2012 1040.  Just don’t forget to use the 2012 Tax Rate Schedule and not the 2013 one.