Whilst here at the US Tax Team, tax advisory services form a large portion of our business, one of our main services offered is tax return preparation.
One of our most frequently asked questions from our tax return preparation clients, is “why are there two copies of most pages of my tax return?”. Well, the answer is fairly simple, AMT…Alternative Minimum Tax.
What is AMT?
AMT as above, stands for Alternative Minimum Tax, it is a parallel tax system designed to ensure that high-income individuals, corporations, trusts, and estates pay at least a minimum amount of tax, even if they qualify for certain deductions and credits that would significantly reduce their regular tax liability.
AMT came into place, albeit with many changes since, in 1970. The AMT recalculates income tax after adding back certain tax preference items and applying different rules for deductions.
In basic terms, it’s a method to calculate how much tax a person would owe, should all of the different tax benefits and credits offered by the IRS, not exist.
Why Does AMT Result in Two Copies of Most Pages?
One of the most common questions from clients, is “why do I have two copies of most pages in my tax return?”. Well, this is AMT in action.
We’re seeing here two tax calculations, one with ordinary IRS deductions/credits etc, and one if those benefits didn’t exist. You’ll note “AMT” printed across the top of the duplicate pages.
On these forms, if the AMT calculation results in a higher tax liability, you are required to pay the AMT instead of the regular tax. However, for many U.S. citizens living in New Zealand, this additional tax is rarely a concern.
Will I have to pay AMT if I live in New Zealand?
For U.S. citizens residing in New Zealand, the AMT calculation usually does not result in additional tax liability. This is largely due to two key tax benefits available to expatriates: the Foreign Tax Credit (FTC) and the Foreign Earned Income Exclusion (FEIE).
Foreign Tax Credit (FTC): FTC allows U.S. taxpayers to offset the taxes paid to foreign governments against their U.S. tax liability. Since New Zealand's tax rates are generally comparable to or higher than those in the U.S., the FTC often fully offsets any potential AMT liability. In essence, the taxes you've already paid to the New Zealand government reduce your U.S. tax bill, including any potential AMT.
Foreign Earned Income Exclusion (FEIE): The FEIE allows U.S. citizens living abroad to exclude a certain amount of their foreign-earned income from U.S. taxation. For the 2024 tax year, the exclusion amount is $120,000. This means that if your income is below this threshold, it may not even be subject to regular U.S. taxes, let alone AMT.
Summary
In summary, while the AMT requires you to calculate your tax liability under two different systems, U.S. citizens living in New Zealand rarely end up paying AMT.
Fortunately, due to the NZ/US double taxation treaty, certain benefits exist for NZ based US citizens that in essence, bypass the AMT system.
However, this is just another reason to ensure that your tax return is prepared accurately and professionally.
If you have any questions or are seeking tax advice, reach out today – info@ustax.nz or 09-242-3445