What is the Alternative Minimum Tax?

Targeting high-income taxpayers, the alternative minimum tax was enacted to combat only 155 households who were getting away with not paying any tax at all through credits, deductions, and exemptions. By today’s numbers, the AMT covers millions of families and grows each year. In 2008, the AMT grew to 3.9 million (up from 605,000 in 1997) taxpayers, an equivalent of about 4% of all individuals.

The alternative minimum tax adds certain tax-beneficial items back into your adjusted gross income, recalculating your income tax. There’s a specific set of rules assigned to the AMT regarding how to determine taxable income with allowed deductions

If you opt not to use tax software to do your taxes, and prefer manual filing, you’ll basically need to do your taxes twice to determine if you need to pay the AMT. Calculate your taxes with the standard 1040 rules, and again with the AMT rules.

Situational Example:

The easiest way to explain which tax return is right is to say that the IRS will count the higher of the two amounts: either the standard federal tax or the AMT rate.

For instance, you calculate your tax for the current year is $10,000 using the standard 1040 rules. You also determine your alternative minimum tax is only $5,000. Since the AMT is lower than your federal taxes, you are not required to pay any alternative minimum amount.

Conversely, if the above scenario determines that your traditional taxes equate to $10,000 but the AMT rules increase your taxes to $15,000, then you would become subject to the rules of the AMT and be liable for paying the greater amount, $15,000.

What is Form 3921?

Have you worked at a private startup for over a year, and held employee incentive stock options? If so you likely received a Form 3921 from your employer. Now that it’s tax season, here’s what you need to do.

This form documents to the IRS that you have exercised stock options from your employer, and reports any unrealized losses and gains affiliated with those stocks.

An unrealized gain or loss occurs when you’ve bought something, for example, shares of the company, at a specific price, and the value has either increased or decreased since the time of purchase. It’s “unrealized” because you still hold the stocks and haven’t sold them to reap (or realize) the financial difference.

Information on the Form 3921

There’s different information reported on the Form 3921 as follows:

Box 1: Date of Options Granted- this is the date the options became available to you, generally the day you start as an employee or the day you received the options as an incentive.

Box 2: Date of Options Exercised – this is the date you purchased the options.

Box 3: Exercise Price Per Share – this is the price at which you purchased the shares.

Box 4: Fair Market Value Per Share on Exercise Date – this is the value of each share on the day you purchased.

Box 5: Number of Shares Transferred – lists how many shares you purchased

Box 6: If Other Than TRANSFEROR, Name, Address, and EIN of Corporation Whose Stock Is Being Transferred – listed here is information regarding the company who is providing you the stock.

All the information on Form 3921 is provided to help you determine a basic calculation which can be applied to Form 6251, Alternative Minimum Tax on Line 14, Exercise of Incentive Stock Options.

Using Form 3921

There are three different steps to complete to calculate your adjustment with Form 3921.

  1. Multiply the number in Box 4 by the number in Box 5 to determine how much the shares you have are currently worth.
  2. Multiply the number in Box 3 by the number in Box 5 to determine how much your shares were worth when they were offered and how much you paid to purchase these shares.
  3. Subtract the first number from the second to determine a specific dollar amount corresponding to your adjustment.

Don’t forget that alimony and child support have an impact on your taxes. You have to report the amounts when you file. Here’s the breakdown.


Alimony payments are deducted from your taxable income, which lowers the amount you are taxed on as long as you meet the following requirements:

  • You pay by cash, check, or money order.
  • Your spouse doesn’t live in the same house.
  • Payments made after your ex dies or remarries aren’t counted, as you aren’t required to pay these.
  • The payments must be for alimony only, and not counted toward child support.

If you’re the recipient of alimony payments, you are required to report them as income. You’ll need to provide your ex with your Social Security Number, so they are able to claim the payments. If you don’t provide your ex with your number, you may be subject to a $50 fine from the IRS.

Child Support

Child support payments don’t have as much impact on your taxes quite like alimony does.

You aren’t required to report or deduct child support; however, you may be able to claim the child as a dependent if you pay child support. There are no tax breaks related to support payments, however since you are technically supporting the child, even partly, you may be able to claim the child as a dependent.

Qualifying Widow or Widower Status

If you’ve lost your spouse, you may qualify for a special tax filing status. The qualifying widow(er) status can be used by taxpayers when filing a tax return after their spouse has died. There are some additional requirements that must be met as follows:

When you file a return for the year your spouse dies, you’re still eligible to file a joint return as long as you haven’t remarried and the executor of your spouse’s estate approves the joint return. However, if either spouse was a non-resident alien at any point, you won’t be able to file a joint return.

For that first year, you’ll include your entire amount of income and deductions for the whole year. Your spouse’s income and deductions are included up to the date of death, and if your spouse owed taxes, you may be liable for the outstanding debt if the estate can’t pay it.

For the next two years after the death, you’ll be eligible to use the qualifying widow(er) status, which offers a higher standard deduction and lower tax rate than the Single taxpayer status. There are certain requirements you have to follow in order to use the status:

  • You haven’t remarried.
  • You have a dependent child (not foster child) who lived with you the entire year and you provided more than half of the child’s support and maintenance costs for the home.
  • You were eligible to file a joint return the year your spouse died, even if you didn’t file jointly.

For the first year that your spouse died, you should still file married filing jointly. Then for the two tax years that follow, you can use the qualifying widow(er) status when you file your return.

Deducting Job Search Expenses

Many people don’t know they can write off expenses related to searching for a job, as its not a common deduction. That’s likely because there are specific rules regarding what is eligible for deduction and what isn’t.

First, expenses must be incurred while searching for a job within your current occupation. You can’t seek employment in a new industry and attempt to deduct the expenses.

You are able to deduct placement and employment agency fees as long as you’re seeking inside your current occupation. If you receive repayment of these fees later by an employer, you’ll have to include the reimbursement amount in your gross income, up to the amount you deducted earlier.

The costs of prepping and mailing copies of your resume to different employers within your current industry can also be deducted.

Looking for a new job may require travel. If you incur expenses to and from your destination while traveling to find work, as long as its within your current occupation, you can deduct the expenses.

You’re unable to deduct job search costs if there’s a significant period between your last job and the date you started looking for new employment.

You can’t deduct costs related to finding your very first job.

To be deductible, all job search expenses, combined with other costs, must exceed a specific limit, as job search expenses are categorized as a miscellaneous itemized deduction. These types of expenses must exceed 2% of your adjusted gross income (AGI) in order to be deducted.

Are Scholarships Taxable?

The answer is possibly. Scholarships can be partially tax-free, while some of the funding is considered taxable. It depends on how the funds are allocated.

If you are a full or part-time student working toward a degree at an eligible educational institution, including primary, secondary or post-secondary schools, then your scholarship is likely tax-free. There are certain expenses that the scholarship or fellowship can be used for in order to remain tax-free. Non-taxable scholarships must be applied to tuition, fees, books, supplies, and required equipment for your courses.

Your scholarship is taxable if you used any part of it for room and board, travel, research, clerical equipment, or other similar expenses. However, only the portion used for these expenses is considered taxable, as the amount used for tuition remains tax-free.

You don’t have to file a tax return if your scholarship is tax-free and it was the only income you had for the year.

Pell Grants and Fulbright Scholarships are often treated similarly when determining the amount that is tax-free. As long as they are used for qualifying educational expenses, Pell, Title IV and other need-based grants, are generally tax-free. Benefits given to veterans, like educational payments, trainings, or assistance are tax-free and do not need to be reported as income when filing a return.

What is an Innocent Spouse?

An innocent spouse seeks to be relieved from the liability of their spouse’s tax issues. Relief from Joint and Several Liability is Section 6015 of the Internal Revenue Code.

Married taxpayers who file a joint return are liable for taxes, interests, and penalties according to the return, as well as any other taxes the IRS imposes. As both parties are liable, there are some situations where one may claim relief from joint and several liability using IRC 6015.

If it’s determined that the taxpayer signed the return under duress, the return is not processed as a joint return. In this case, you are not held to joint and several liability, though you may need to file a separate return for the tax year. Joint and several liability even applies to taxpayers where one spouse earned all the income for the year, or for taxpayers who later get divorced.

To request relief, you must file Form 8857, along with a statement addressing the requirements for being granted relief. Relief may be requested if a tax controversy occurs, including any pre-assessments and collections as determined by the statute and Treasury requirements for relief. Innocent spouse is different from, and should not be confused with the rules for, an injured spouse. An injured spouse receives relief from over-payment using Form 8379.

Joint and Several Liability relief comes in three different forms:

  • Innocent Spouse Relief – 6015(b)
  • Separation of Liability – 6015(c).
  • Equitable Relief – 6015 (f)

Even if you seek relief using 6015 (b) or (c), if it is denied, you may still receive relief under 6015 (f).

Requesting Relief

If you wish to seek relief for Innocent Spouse Relief, Separation of Liability, or Equitable Relief, you’ll need to complete Form 8857 and file it with your taxes. You should review the requirements of IRC 6015 prior to filing the Form. You only need to file a single Form 8857, even if you’re requesting relief for multiple tax years. You’ll have to attach a brief to the Form 8857 stating the reasons you feel you qualify for relief. Check the instructions on the form for relevant information needed to properly complete the form.

The IRS has to inform the other party – your spouse or former spouse – if you request innocent spouse relief or separation of liability in order to encourage participation in determining how much relief you are entitled to. The IRS will contact the spouse to inform them of the relief request. There are certain safeguards in place to protect victims of domestic abuse. In these situations, you can write on the top of Form 8857 “Potential Domestic Abuse Case” and find more information on the IRS website.

When to Pay Self-Employment Taxes

Individuals who are considered self-employed must still pay taxes. Self-employment taxes are contributions made to Social Security and Medicare, generally through quarterly payments known as estimated tax payments.

Self-employment tax applies to anyone who makes $400.00 or more. In these cases, the taxpayer must file a Schedule SE (Form 1040) to pay self-employment taxes, since withholdings are not taken on their income.

Self-employed taxpayers meet any of the following conditions:

  • They are a sole proprietor or independent contractor for a business or trade.
  • They are a member of a business or trade partnership.
  • They conduct business on behalf of themselves.

Definition of Business and Trade

Business or trade is considered when one performs services as a means of making a profit. Each situation is different when it comes to determining what is classified as a business or trade. How often you perform the service and the regularity of transactions are important in determining if your activity is a business or trade. You aren’t required to make a profit in order to be considered self-employed, however, you must be attempting to profit and further the business.

Part-time Businesses

You don’t have to perform your services or activity full-time to be considered self-employed. You can work full-time as an employee of another company, and still have a part-time business that falls under the self-employment guidelines.

What is an Injured Spouse?

Taxpayers who file a joint return with their spouse and have part (or all) of their share of overpayment applied to a spouse’s past tax debts may be entitled to claim a refund as an injured spouse. A spouse’s past debts can include:

  • Tax liability
  • Child/spousal support
  • Federal non-tax debt
  • State income tax

Situational Example: Your spouse’s child support payments are in arrears, and you file a joint tax return. Any refund owed to you for overpayment of taxes can be withheld by the IRS and put towards the spouse’s arrears, even if the refund is generated solely by your overpayment.

In this scenario, taxpayers who have income and withholdings can request a refund of the amount allocated to them from filing a joint return with Form 8379, Injured Spouse Claim Allocation.


In order to claim your portion of the refund as an injured spouse, the following need to be met:

You are not required to pay any past due amounts, as the responsibility for the debt falls on your defaulted spouse.

You reported income on your joint return, such as wages or taxable interest.

You made and reported payments of taxes, such as Federal Income Tax withholdings or estimated payments, or you claimed the Earned Income Tax Credit or other credit that can be refundable.

When the EITC is Denied

If a taxpayer has had an EITC claim denied for any year after 1996, or if the EITC claim was reduced, and not due to a mathematical or clerical error, the taxpayer is required to attach Form 8862 the next time he tries to claim the EITC. If not, the claim is automatically denied. This type of denial is considered a clerical or mathematical error however the taxpayer still can’t claim the EITC without completion of Form 8862.

If the EITC claim was denied due to a determination of reckless or intentional disregard of the EITC rules, the taxpayer is unable to claim the EITC for the next 2 years. If it’s determined the error was fraudulent, the ability to claim the EITC is blocked for the next 10 years.

Documents You’ll Need

Make copies of all the documents you’ll be sending to the IRS, and never send the originals. If you receive a Form 886-H-EITC, it’s because the IRS need additional documents to verify dependency exemptions or the EITC. The documents will be listed on the form and can include:

  • Paystubs, W-2s, 1099s, and other proof of income for the questioned tax year.
  • Social security card
  • Child’s birth certificate and social security card if claiming as a dependent
  • Mortgage or lease documenting at least 183 days in the residence (in most cases 6 months). If you have a P.O. Box, you’ll need to request Postal Form 1093 to show your geographical address.
  • School records for qualifying children, including date of attendance, guardian’s name, and child’s home address.
  • Notarized letter (or on official letterhead) from childcare provider documenting dates childcare was provided, along with the name of the guardians and child’s home address.
  • Medical records for the child showing service dates and child address.
  • Affidavits from friends, family and neighbors.