US Expat Taxes and the Alternative Minimum Tax (AMT)
Your US expat taxes are eligible for multiple deductions, credits, and exclusions that can often eliminate all of your tax liability with the IRS. Because so many individuals were eliminating their US tax liability, the IRS introduced the Alternative Minimum Tax in 1969 as an alternative form of taxation for wealthy individuals. US expat taxes are no exception to this legislation, and this affects a growing number of individuals paying US expat taxes.
The Alternative Minimum Tax
All taxpayers are required to pay either the regular income tax or the Alternative Minimum Tax (AMT), whichever is greater. The AMT is calculated as a flat rate on total income. Itemized deductions are not permitted before the AMT is calculated. Other deductions and credits are limited or not permitted in calculating AMT.
The IRS does allow special exemptions from total income when calculating the AMT, and the exemption amounts are adjusted for inflation when Congress and the IRS see necessary. The most recent AMT exemptions were increased as follows:
- Married, filing jointly: $74,450
- Single or Head of Household: $48,450
- Married, filing separately: $37,225
All individuals can also claim an exemption for dependents, which is currently $3,700.
However, the AMT exemptions are phased out once an individual passes a certain income threshold. For those filing single or as head of household, the exemption cannot be taken if their adjusted gross income is more than $112,500. For those who are married and filing jointly, the exemption is phased out at $150,000. For married couples filing separate returns, the exemption is phased out at $75,000.
Once you have taken the appropriate exclusion based on your filing status from your adjusted gross income, you can determine your AMT liability. The AMT rates are based on filing status and are tiered based on income. Once you pass a certain threshold, you are taxed at the high tax rate. The tax rates are as follows:
- Single or married filing jointly, $175,000 or less: 26%
- Single or married filing jointly, more than $175,000: 28%
- Married, filing separately, $87,500 or less: 26%
- Married, filing separately, more than $87,500: 28%
The rate for capital gains is 25% regardless of filing status.
Because the IRS recognizes that many individuals do not know if or how to calculate the AMT, it provides an Alternative Minimum Tax Assistant at IRS.gov each tax year to help taxpayers or tax preparers figure out if the AMT should be paid and, if so, to what extent.
AMT for Expats
Due to the numerous credits and deductions in place to help eliminate dual taxation on US expat taxes, many wealthy US citizens living abroad find that they are subject to the AMT. It is therefore quite advisable that you use the Alternative Minimum Tax Assistant to help you determine whether or not you need to pay the AMT. In the event that you do need to pay the AMT, it is advisable that you talk to an expat tax expert to understand how the AMT system works in your particular situation.
If you do need to pay the AMT, you will not be able to apply the foreign earned income exclusion or foreign housing deduction (or any other deductions, for that matter) to your adjusted gross income. The foreign tax credit, however, can still be applied to the complex AMT calculation, although the application is slightly different and will not be the same as the dollar-for-dollar credit applied to regular US expat taxes.
While the AMT was once only a concern of the wealthy, the IRS has not adjusted the income levels for inflation, so more and more it is impacting the middle class. For this reason, more and more individuals find themselves falling into the income levels that could require them to pay the AMT. Expats are particularly susceptible to the AMT as a result of the various US expat tax deductions and credits that often eliminate their US tax liability.
Reporting the AMT on US Expat Taxes
After using the Alternative Minimum Tax Assistant, taxpayers should be able to determine whether or not they should pay the AMT on their US expat taxes. The AMT Assistant will either tell taxpayers they do not need to pay the AMT on their US expat taxes, or it will guide them to Form 6521 – Alternative Minimum Tax – Individuals. By filing out Form 6521, individuals are able to determine whether they owe the AMT or just regular income taxes and, if the AMT is owed, how much. If you determine that you need to pay the AMT, you must attach Form 6521 with your Form 1040.
If you paid the AMT in previous years, you may be eligible to take advantage of a minimum tax credit against your taxes in coming years. You can do so by completing and attaching Form 8801 – Credit for Prior Year Minimum Tax – Individuals, Estates and Trusts. Many individuals find themselves in a situation where they need to pay the AMT one year but not the next. For that reason, if you ended up paying a substantially higher tax for one year, you are able to claim a credit against your taxes in the years to come.
In any event, if you find that you owe the AMT in a given year, it is suggested that you speak to an expat tax advisor and seek preparation for your US expat taxes. The AMT structure is extremely complex and can easily lead to confusion when it comes time to file your taxes. Mistakes can be costly and time consuming, so contact us if you would like to seek help on your US expat taxes or if you find yourself liable for the AMT.