The alternative minimum tax is a real possibility if you earn a good income. The tax's purpose is to eliminate certain deductions and tax benefits that help wealthy taxpayers avoid paying taxes. It acts as a separate tax system from the calculations on your 1040, and it begins by eliminating various deductions from income, including the standard deduction and many itemized deductions. For most taxpayers, whether or not they take the standard deduction should have no bearing on whether they owe the AMT.
For purposes of calculating the AMT, the IRS allows exemptions: an amount of income that's not subject to this tax. For 2012, the exemption amount is $50,600 if you’re single, and $78,750 if you're married filing jointly. These exemptions are expected to increase to $51,900 and $80,750 respectively for 2013. If you earn more than these amounts, you may be subject to the tax -- but most taxpayers will have to earn considerably more than this before the AMT kicks in. The only way to be positive, however, is to do your taxes twice – once on Form 1040, then on Form 6251. Form 6251 calculates the AMT and will tell you definitively if you owe it.
Form 6251 begins with your adjusted gross income – before you take the standard deduction -- on line 38 of your 1040. If on the other hand you itemized on your 1040, you would begin Form 6251 with the amount of your income reflected on line 41. This is a deceptive advantage, however, because as you complete Form 6251, you must add back many of your itemized deductions. In other words, most people, most of the time -- whether or not they itemize -- start the AMT calculations with their adjusted gross income, or something very close to it.
As you complete Form 6251, you not only add back many of your itemized deductions, but you add back other income as well. For example, interest from government-issued bonds isn't taxable on Form 1040, but it contributes to your income on Form 6251. After you've added this income back in, line 28 of Form 6251 reflects your taxable income for AMT purposes. For most taxpayers -- those who don't take a lot of exotic tax breaks due to trusts, mining activities, and the like -- the figure on line 28 will be pretty close, once again, to where they started: their AGI.
Figuring the AMT
Once you have the figure on line 28, you deduct the exemption for your filing status -- for example, $78,750 for most married couples filing jointly in 2012. You calculate the AMT, which is 26 percent for most taxpayers, on the difference. For example, if a married couple's AGI was about $100,000 in 2012, 26 percent of the difference is $5,525. You then compare this to the figure you calculated "the regular way" on line 44 of the 1040. If it's lower -- and it will be lower for most taxpayers -- you do nothing. You don't owe any additional tax. If it's higher, you calculate the excess -- the difference between line 33 on Form 6251 and line 44 of Form 1040 -- and enter it on line 45 of your 1040. This is the additional tax you owe.
Standard Deduction Vs. Itemizing
If you're concerned about avoiding the AMT, speak with a tax professional, because the key is reducing your taxable income. Most taxpayers with non-exotic deductions -- say, a family that deducts mortgage interest, charitable donations and some medical expenses -- won't find that their method of itemizing makes much if any difference. However, you can try calculating your taxes using both the standard deduction and itemizing deductions to see whether it makes a difference.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.