What is an Alternative Minimum Tax - AMT
An alternative minimum tax (AMT) recalculates income tax after adding certain tax preference items back into adjusted gross income. AMT uses a separate set of rules to calculate taxable income after allowed deductions. Preferential deductions are added back into the taxpayer's income to calculate his or her alternative minimum taxable income (AMTI), and then the AMT exemption is subtracted to determine the final taxable figure.
BREAKING DOWN Alternative Minimum Tax - AMT
The difference between a taxpayer's AMTI and his AMT exemption is taxed using the relevant rate schedule. This yields the tentative minimum tax (TMT). If the TMT is higher than the taxpayer's regular tax liability for the year, they pay the regular tax and the amount by which the TMT exceeds the regular tax. In other words, the taxpayer pays the full TMT.
AMT Exemption Amounts for 2018
Beginning in 2018, the AMT exemption for individual filers is $70,300. For married joint filers, the figure is $109,400.
If an individual taxpayer completes Form 6251 and discovers their AMTI exceeds $95,750, they typically have to pay AMT, but first they get to subtract the exemption amount ($70,300 for 2018). If their AMT is less than the exemption, they do not have to pay AMT. For married couples filing jointly, the AMTI has to exceed $191,500 and the exemption figure is $109,400.
It's important to note, though, that taxpayers with AMTI over a certain threshold do not qualify for the AMT exemption. For 2018-2025, these thresholds are $500,000 for individuals and $1 million for those married filing jointly. For more information, see the IRS's website.
Purpose of AMT
AMT is designed to prevent taxpayers from escaping their fair share of tax liability through tax breaks. However, the structure was not indexed to inflation or tax cuts. This can cause bracket creep, a condition in which upper-middle-income taxpayers are subject to this tax instead of just the wealthy taxpayers for whom AMT was invented. In 2015, however, Congress passed a law indexing the AMT exemption amount to inflation.
To determine if they owe AMT, individuals can use tax software that automatically does the calculation, or they can fill out IRS Form 6251. This form takes medical expenses, home mortgage interest and several other miscellaneous deductions into account to help tax filers determine if their deductions are past an overall limit set by the IRS.
The form also requests information on certain types of income such as on tax refunds, investment interest and interest from private activity bonds, as well as numbers corresponding with capital gains or losses related to the disposition of property. The IRS has specific formulas in place to determine which portion of these income and deductions the tax filers need to note on Form 6251, and it uses another set of formulas to determine how these numbers lead to AMTI.