Alternative Minimum Tax and Pre Tax Deductions
The Alternative Minimum Tax (AMT) is a separately figured tax that eliminates many deductions and credits, thus increasing tax liability for an individual who would otherwise pay less tax. The AMT is triggered in part by large amounts of itemized deductions.
The Alternative Minimum Tax sets a rate of either 26% or 28% for income subject to this tax. Large amounts of Medical Expense Deductions may help push you into this extra tax. Pre taxing of payroll deductions can reduce your possible Alternative Minimum Tax exposure in two ways:
- Reducing Medical Expense Deductions
- Reducing Reportable Income
Alternative Minimum Tax - Lower Medical Expense Deductions
The alternative minimum tax has a number of triggers: itemized deductions being one of the most prominent. A taxpayer with large amounts of un-reimbursed medical expenses may find that this total pushes them into the AMT.
A Healthcare Flexible Spending Account siphons off a portion of your un-reimbursed medical expenses, thereby lowering your chances of being pushed into AMT.
Alternative Minimum Tax - Lowering Reportable Income
Lower reportable income means less income that might be taxed: whether it's the conventional federal income tax or the alternative minimum tax.
Pre tax elections reduce your reportable W2 income, thereby reducing the amount of income subject to AMT calculations. Example - A family electing $10,000 in pre tax elections would expose $10,000 less in income to the Alternative Minimum Tax - thus generating up to $2,600 in possible tax savings.
