The alternative minimum tax, usually known as AMT, is seldom if ever paid by individuals. In 2019, just 0.1% of families paid the AMT, and the bulk of them had incomes over $1 million, according to the Tax Policy Center.
However, when the AMT does apply, it can be a nasty shock, requiring you to pay tax on income you believed was exempt or preventing you from using deductions you believed you were entitled to.
What Is the AMT (Alternative Minimum Tax)?
The Alternative Minimum Tax (AMT) is, as the name implies, a different method by which your federal income tax liability might be determined. If you do, you will need to determine your tax due twice (once under conventional income tax rules and once under AMT standards) and pay the greater of the two amounts.
In 1969, Treasury Secretary Joseph Barr informed Congress that 155 filers with adjusted gross incomes of over $200,000 (nearly $1.4 million in today’s currencies) had paid no federal income tax. This led to the introduction of the alternative minimum tax.
Congress made tax law even more difficult by adopting the AMT rather than addressing tax deductions, credits, and other loopholes in the tax system that made this situation conceivable.
What is the Alternative Minimum Tax?
Complicated formulas are required to determine the AMT. Since AMT may be complicated, it’s best to utilize tax software or see a professional if you think you could owe this tax. However, here’s a little rundown of how everything operates:
- Calculate your taxable income under standard tax rules.
- Form 6251 guides you through the process of determining your alternative minimum taxable income by adding back certain deductions and tax-exempt income (AMTI).
- Subtract your AMT exemption amount (found on Form 6251), then multiply the resulting amount by the AMT tax rate to get your alternative minimum tax.
- If your AMT liability exceeds your usual tax burden, you must pay the AMT.
Who Pays Taxes?
Before the Tax Cuts and Jobs Act of 2017 (TCJA), the AMT was more common among upper-middle-class households. The AMT had a far smaller impact before the TCJA, but it was somewhat mitigated by the increased exemptions and other adjustments to the AMT.
The number of persons subject to AMT dropped from an estimated 5 million in 2017 to less than 200,000 in 2018, the first year the modifications were implemented.
If your yearly income is more than the Alternative Minimum Tax exemption limit, you must figure out how much tax you owe under both the normal and AMT regulations and pay whichever is more.
While AMT is typically associated with high-income filers, it is not the sole factor that might trigger AMT. If you have any of the following, you may need to figure out your AMT tax bill:
- Motivated stock options (ISOs)
- Intangible expenses for drilling (i.e., investing in the oil and gas industry)
- Interest on tax-exempt private activity bonds (PABs)
- Profits or losses derived from passive activity
- The Foreign Tax Credit deductions for net operating loss (NOL)
Amounts Exempt from AMT
The regulations provide exemptions from AMT that shield low and middle-income taxpayers from its harsh effects. These exclusions are analogous to the AMT’s standard deduction. AMT exemption levels for 2021 and 2022 are as follows:
|Filing Status||2021 AMT Exemption Amount||2022 AMT Exemption Amount|
|Single and unmarried taxpayers||$73,600||$75,900|
|Married filing jointly and surviving spouses||$114,600||$118,100|
|Married filing separately||$57,300||$59,050|
However, if your income is too high, the exemption starts to disappear. A single taxpayer’s phase-out begins at $523,600 in AMTI and a married couple’s phase-out starts at $1,047,200 for the 2021 tax year. You will lose 25% of your AMT exemption for every dollar of AMTI that is beyond the phase-out level.
Take the hypothetical case of a single taxpayer with an adjusted gross income of $600,000. You are now $76,400 above the phase-out level ($600,000 minus $523,600 = $76,400). You must subtract $19,100 (=$76,400 * 0.25) from your AMT exemption amount. Which means that just $54,500 of your income would be free from AMTI.
How to Calculate the Alternative Minimum Tax
Fill out IRS Form 6251 to see if and how much AMT you’ll owe. In Form 6251 Year 2021:
- Line 1: Determine your taxable income using standard IRS guidelines. This information may be found on line 15 of your 2021 Form 6251. If line 15 is zero, subtract line 14 from line 11 and begin with the resulting amount.
- Add back some adjustments that lowered your taxable income under standard tax rules to lines 2a through 3. The lengthy list of adjustments contains several income and deduction categories that do not apply to the majority of taxpayers. You may find further information on each of these topics in the IRS Form 6251 Instructions.
- Add lines 1 through 3 to determine your alternative minimum taxable income on line 4. If your filing status is married filing separately and your total exceeds $752,800, you must provide an extra amount on line 4. Check the Form 6251 Instructions for the extra amount.
- Line 5: Based on your filing status and income, enter the AMT exemption amount.
Subtract line 5 from line 4 in line 6. If the result is greater than zero, line 5 is reached. If the result is less than or equal to zero, insert zero on lines 6, 7, 9, and ll. AMT is not owed.
- Apply the AMT tax rate to Line 7. This rate is either 26% or 28% for the majority of taxpayers, although a special rate may apply if you claim the foreign earned income exclusion, capital gain distributions, or eligible dividends. In Part III of Form 6251, follow the instructions to determine if you must calculate your AMT tax.
- Line 8: If appropriate, enter your AMT foreign tax credit.
- Subtract line 8 from line 7 to calculate your estimated minimum tax liability for line 9.
- Line 10 is reserved for farmers and fishermen who compute their taxes using Schedule J. Follow these guidelines to recalculate the tax if this applies to you.
- Line 11. line 10 subtracted from line 9 If it is zero or below, you have no AMT liability. If the result exceeds zero, insert it on line 1 of Schedule 2
How Does the Alternative Minimum Tax Affect Tax Credits?
Income tax is reduced in a dollar-for-dollar fashion via tax credits. If you owe $10,000 in taxes but are eligible for a $2,000 tax credit, you’ll only have to pay $8,000.
You can minimize your Alternative Minimum Tax bill by claiming tax credits including the child tax credit, the dependent care credit, and the foreign tax credit. If you have already paid the AMT, you may be eligible for a tax credit.
However, it’s possible that some of your credits will be lost. Many company tax credits, such as the Low-Income Housing Credit, the Work Opportunity Tax Credit, and many more, are capped by the Alternative Minimum Tax.
To avoid owing less than the estimated minimum tax shown on Form 6251, you can’t use these credits to lower your taxable income. If your firm suffers a loss of general business credits because of the AMT, you can use those credits to reduce your tax bill in the future for up to 20 years.
It will be difficult to complete your tax return if you need to calculate your alternative minimum tax and compare it to the amount of tax you owe under the conventional income tax laws. As a result, if you need assistance filling out Form 6251, it’s best to utilize tax preparation software or see a tax expert.
You may avoid receiving a notification from the IRS stating that you owe more money and spare yourself the effort and stress of calculating your possible AMT burden on your own.