The alternative minimum tax is a separate tax calculation determined in parallel with an individual’s regular income tax calculations. The AMT takes out various tax preferential items that an individual may receive, which lowers his taxable income. The AMT was designed to ensure that high income earners do not pay little-to-no tax but instead pay a minimum.
How Does It Work?
The AMT takes out preferential tax treatments including the non-taxable portion of capital gains, stock options benefits, Canadian dividends and losses and deductions related to tax shelters and limited partnership interests. Tax preferential means the tax rate is better than on normal salary and interest income. The result is an adjusted taxable income that is reduced by a minimum exemption for low-income earners and some other nonrefundable credits to arrive at the minimum tax. A special federal tax rate is used to calculate and therefore arrive at the minimum tax amount. Individuals then have to pay the greater of the regular tax amount or the AMT.
Common Triggers of AMT
You have to pay alternative minimum tax if it is more than the federal tax you calculate in the usual way. It applies to any of the following claims: a taxable capital gain or a loss, including your share of a partnership loss resulting from or increased by claiming capital cost allowance on rental properties; a loss from a limited partnership; carrying charges on certain investments; a loss from resource properties resulting from or increased by claiming a depletion allowance, exploration expenses, development expenses or Canadian oil and gas property expenses; a deduction for an employee home relocation loan; a deduction for security options; a federal political contribution tax; an investment tax credit; a labour-sponsored funds tax credit; a federal dividend tax credit; or an overseas employment tax credit.
Strategies to Reduce AMT
If your AMT is greater than an individual’s normal income, look at ways to reduce and defer preferred tax-treated income or discretionary deductions for the following years. If the AMT calculation is greater, you might consider limiting Registered Retirement Savings Plan deductions to increase regular tax payable and save the balance of the deduction for the next year. Individuals taking large dividends from their business could consider increasing their employment income. If the individual is taking full deductions for depreciation on a self-employment business or a rental business, consider reducing the expense and deferring for a later year.
Investment portfolios could also be switched to earn more income at full rates such as interest income instead of dividend income. Interest income receives preferred tax treatment.
If you pay AMT in one year but not the following year, you might be able to claim credits against your current year taxes for prior minimum tax payments. These amounts can be carried forward up to seven years. There is no ability to carry them back.
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