Almost 4 million taxpayers are expected to get hit with the Alternative Minimum Tax—the dreaded AMT—on their 2013 tax return. They’ll face a tab of $6,600 on average, according to the Tax Policy Center.
Many taxpayers don’t realize that we have a two-tax system in this country—with the regular tax and the AMT—and that taxpayers have to pay whichever tax is higher.
(Read more: Do you have to pay the AMT? Find out)
A certain amount of your income is exempt from the alternative minimum tax. If you’re a married couple, the full exemption amount is $80,800, and it’s $51,900 for single taxpayers. The “AMT exemption” phases out as incomes rise—that means upper-income individuals and couples making between $200,000 and $500,000 are most likely to face the this tax.
So what are some triggers to watch out for that could put you at risk for the AMT?
(Read more: World’s Highest Tax Rates)
The AMT doesn’t allow for many of the deductions that you may qualify for on your regular federal income-tax return—like personal exemptions, standard deductions and deductions for state and local income taxes.
If you live where there are high state and local taxes (often a big deduction on your regular taxes), have a lot of miscellaneous deductions or have a lot of children (which means a lot of personal exemptions), these deductions are adjusted downward or eliminated entirely when calculating the alternative minimum tax.
As a result, they may trigger an AMT liability.
(Read more: 8 things you need to know about tax reform)
Other triggers include exercising (but not selling) stock options, reporting large investment expenses or claiming accelerated depreciation. If you used a home-equity loan or line of credit for something other than a home improvement, that could also put you at risk for an AMT liability, too.
So what do you do?
If you’re a borderline candidate for the AMT, be careful in bunching your itemized deductions, because they might lose their value. Tax experts advise seeing if you can shift some deductions to a year when you won’t be subject to the AMT.
But for many upper-middle-class taxpayers—who are firmly in the AMT zone—there may not be much to do except be prepared to pay the higher tax.
—By CNBC’s Sharon Epperson. Follow me on Twitter @sharon_epperson.
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