Alternative Minimum Tax - AMT

What is '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), 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 tentative minimum tax (TMT). If TMT is higher than the taxpayer's regular tax liability for the year, he pays 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 2017 and 2018

The AMT exemption amount is the amount of AMTI that is exempted from AMT. For 2017, the AMT exemption for individual taxpayers is $54,300. Beginning in 2018 the AMT exemption for individual filers is $70,300. For married joint filers, the figures are $84,500 in 2017 and $109,400 in 2018..

If an individual taxpayer completes Form 6251 and discovers his AMTI is $100,000, he typically has to pay AMT, but first, he gets to subtract the exemption amount ($54,300 for 2017; $70,300 for 2018). If his AMTI is less than the exemption, he does not have to pay AMT.

It's important to note, though, that taxpayers with AMTI over a certain threshold do not qualify for the AMT exemption. 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 which AMT was invented. In 2015, however, Congress passed a law indexing the AMT exemption amount to inflation.

Calculating AMT

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 related to 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.