Alternative Minimum Tax: A Simple Guide

  • Accracy
  • 26th Nov, 2023

The alternative minimum tax (AMT) ensures that high earners pay at least a minimum amount of federal income tax. It's like the fail-safe against tax loopholes. Essentially, it requires some taxpayers to calculate their tax liability twice: once under normal tax rules and again under AMT rules. If the second calculation produces a higher tax bill than the first, you're required to pay the higher AMT.

Alternative Minimum Tax: A Simple Guide
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Calculating AMT is complicated, but thanks to the Tax Cuts and Jobs Act of 2017, it now impacts only a small percentage of taxpayers.

Whether the AMT affects you depends on several factors, including your filing status and the amount and type of your income and deductions. Generally, though, the AMT applies to people with an annual income of $200,000 or more.

Who pays the alternative minimum tax?

The TCJA eliminated the corporate alternative minimum tax for all C corporations starting with the 2018 tax year. It didn't repeal the AMT for individuals, meaning owners of pass-through businesses, including sole-proprietorships, partnerships, LLCs, and S corporations may still have to pay it.

Fortunately, tax reform did increase the exemption amount for tax years 2018 through 2025, making the AMT less likely to hit middle-class taxpayers—at least for a few years. If your income is below your AMT exemption amount, you won't have to pay the AMT. Otherwise, you may not know whether the AMT applies to you until you calculate your tax bill under both systems.

How does the AMT work?

To calculate the AMT, you'll use Form 6251. But be forewarned: calculating the AMT is complicated. Tax software will perform the calculation for you, but you may want to understand how the calculations work. Here's a summary of the steps involved.

1. Start with taxable income

Calculate your taxable income as you would normally, or enter the amount from Form 1040, line 15.

2. Make required adjustments

Next, you'll have to add back certain items, including taxes deducted on Schedule A, interest from specified private activity bonds, and net operating loss deductions from a business. You can find a full list of AMT adjustments in the Instructions for Form 6251. The result is your alternative minimum taxable income (AMTI).

3. Subtract your AMT exemption

The AMT exemption amounts are like standard deductions for calculating the AMT. For 2022 and 2023, those exemption amounts are:

| Filing Status | 2022 Exemption Amount | 2023 Exemption Amount | ----- | ----- | | Single | $75,900 | $81,300 | | Married Filing Jointly | $114,600 | $126,500 | | Married Filing Separately | $59,050 | $63,250 | | Head of Household | $75,900 | $81,300 |

4. Multiply the result by your AMT tax rate

While there are seven tax brackets used in the standard federal income tax calculation, there are only two for AMT.

For 2023, if your AMTI minus your AMT exemption is $220,700 or less ($110,350 if married filing separately), your AMT tax rate is 26%. Otherwise, it's 28%.

Can you avoid the AMT?

The purpose of the AMT was to prevent high-income taxpayers from paying less than their share of taxes, so it's not an easy tax to avoid. If you're worried about it, you can try to steer clear of the types of income, deductions, and credits that trigger the AMT.

Many of these "red flag" items may not be familiar to the average taxpayer, but a few common ones are:

  • High gross income relative to taxable income
  • Tax-exempt interest from private activity bonds
  • Exercise of incentive stock options
  • Long-term capital gains

You can find a full list of AMT triggers in the Instructions for Form 1040.

Bottom line

If you do have to calculate and pay the AMT, your taxes will be more complicated. Fortunately, good tax software or a qualified tax professional can help you figure out whether you need to fill out Form 6251 and calculate your AMT liability.

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