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on top of their regular income tax. AMT rates start at 26 percent and move to 28 percent at higher income levels. By comparison, the regular tax rates start at 10 percent and then move through a series of steps to a high of 35 percent. You calculate the tax by completing Form 6251 provided by the IRS.
The original idea behind AMT was to prevent people with very high incomes from using special tax benefits to pay little or no tax. The AMT has increased its reach, however, and now applies to some people who don’t have very high income or who don’t claim lots of special tax benefits. Proposals to repeal or reform the AMT have languished in Congress for years. Until Congress acts, almost anyone is a potential target for this tax.
The name comes from the way the tax works. The AMT provides an alternative set of rules for calculating your income tax. In theory, these rules determine the minimum amount of tax that someone with your income should be required to pay. If you’re already paying at least that much because of the regular income tax, you don’t have to pay an AMT. But if your regular tax falls below this minimum, you have to make up the difference by paying an alternative minimum tax.
The AMT also eliminates itemized deductions, such as investment expenses, employee business expenses, and some medical and dental expenses. It also counts as income the interest from private-activity bonds, a type of tax-exempt bond issued by governments, usually to finance sports stadiums and the like. Finally, AMT rules force you to pay taxes on the spread between the market price and the exercise price of incentive stock options granted by your employer.
STATE TAXES
There are separate tax codes covering each of the 50 states, the District of Columbia, Puerto Rico, the Virgin Islands, and Guam. For the purpose of this book, all of these are classified as state taxes.
States have various means of collecting taxes from its residents. They include but are not limited to income tax, sales tax, real estate tax, and property tax. If you are considering relocating to another state, one of the factors to consider is the overall tax burden you will face for your particular situation. The Retirement Living Information Center has a summary of taxes for each state at www.retirementliving.com . Another useful site is from the Tax Foundation at www.taxfoundation.org . One of the tools compares each state’s tax rate across the years to the U.S. average state tax rate.
Income Tax Rates
Tax rates run from a low of 0.36 percent in Iowa to a high of 11 percent in Hawaii. Most states have a progressive tax system similar to federal tax rates. All states have a minimum income below which no income tax is imposed. Then the rate goes up based on income. For example, Maryland has seven brackets ranging to $1,000 to $500,000.
Seven states have a flat tax, which means one tax bracket after certain deductions and exemptions. Those states are Colorado, Illinois, Indiana, Massachusetts, Michigan, Pennsylvania, and Utah. All taxpayers pay the same rate after meeting the minimum income threshold.
Seven states, Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, have no income tax. New Hampshire and Tennessee only tax interest and dividend income.
Personal Exemptions
Like federal income tax calculations, most states allow a deduction for your personal exemptions (yourself, your spouse, and your children). And like federal taxes, those exemptions can phase out at higher incomes. Colorado and Pennsylvania remain true to their flat tax philosophy and offer no personal exemption deduction.
Federal Tax Deduction
Your federal income tax allows you to deduct your state income taxes on your federal return. However, only a few states (Alabama, Iowa, and Louisiana) allow the full federal income tax to be deducted on the state income tax return. A few others (Missouri, Montana, and Oregon) provide a deduction but limit the amount that can be
The original idea behind AMT was to prevent people with very high incomes from using special tax benefits to pay little or no tax. The AMT has increased its reach, however, and now applies to some people who don’t have very high income or who don’t claim lots of special tax benefits. Proposals to repeal or reform the AMT have languished in Congress for years. Until Congress acts, almost anyone is a potential target for this tax.
The name comes from the way the tax works. The AMT provides an alternative set of rules for calculating your income tax. In theory, these rules determine the minimum amount of tax that someone with your income should be required to pay. If you’re already paying at least that much because of the regular income tax, you don’t have to pay an AMT. But if your regular tax falls below this minimum, you have to make up the difference by paying an alternative minimum tax.
The AMT also eliminates itemized deductions, such as investment expenses, employee business expenses, and some medical and dental expenses. It also counts as income the interest from private-activity bonds, a type of tax-exempt bond issued by governments, usually to finance sports stadiums and the like. Finally, AMT rules force you to pay taxes on the spread between the market price and the exercise price of incentive stock options granted by your employer.
STATE TAXES
There are separate tax codes covering each of the 50 states, the District of Columbia, Puerto Rico, the Virgin Islands, and Guam. For the purpose of this book, all of these are classified as state taxes.
States have various means of collecting taxes from its residents. They include but are not limited to income tax, sales tax, real estate tax, and property tax. If you are considering relocating to another state, one of the factors to consider is the overall tax burden you will face for your particular situation. The Retirement Living Information Center has a summary of taxes for each state at www.retirementliving.com . Another useful site is from the Tax Foundation at www.taxfoundation.org . One of the tools compares each state’s tax rate across the years to the U.S. average state tax rate.
Income Tax Rates
Tax rates run from a low of 0.36 percent in Iowa to a high of 11 percent in Hawaii. Most states have a progressive tax system similar to federal tax rates. All states have a minimum income below which no income tax is imposed. Then the rate goes up based on income. For example, Maryland has seven brackets ranging to $1,000 to $500,000.
Seven states have a flat tax, which means one tax bracket after certain deductions and exemptions. Those states are Colorado, Illinois, Indiana, Massachusetts, Michigan, Pennsylvania, and Utah. All taxpayers pay the same rate after meeting the minimum income threshold.
Seven states, Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, have no income tax. New Hampshire and Tennessee only tax interest and dividend income.
Personal Exemptions
Like federal income tax calculations, most states allow a deduction for your personal exemptions (yourself, your spouse, and your children). And like federal taxes, those exemptions can phase out at higher incomes. Colorado and Pennsylvania remain true to their flat tax philosophy and offer no personal exemption deduction.
Federal Tax Deduction
Your federal income tax allows you to deduct your state income taxes on your federal return. However, only a few states (Alabama, Iowa, and Louisiana) allow the full federal income tax to be deducted on the state income tax return. A few others (Missouri, Montana, and Oregon) provide a deduction but limit the amount that can be
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