Alternative Minimum Tax (AMT)

What Is Alternative Minimum Tax (AMT)?

An alternative minimum tax (AMT) places a floor on the percentage of taxes that a filer must pay to the government, no matter how many deductions or credits the filer may claim.

The United States currently has an alternative minimum tax for taxpayers who earn above certain thresholds.

The 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.

How the Alternative Minimum Tax (AMT) Works

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 tax year 2020, the AMT exemption for individual filers is $72,900. For married joint filers, the figure is $113,400. For tax year 2021, the figures are $73,600 for individuals and $114,600 for couples.

Taxpayers have to complete Form 6251 to see whether they might owe AMT. First, they get to subtract the exemption amount. If their AMT is less than the exemption, they do 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 tax year 2020, the phase-out begins at $518,400 for individuals and $1,036,800 for couples filing jointly. For tax year 2021, it begins to phase out at $523,600, or $1,047,200 for couples filing jointly.

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.

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 beyond an overall limit set by the IRS.

The form also requests information on certain types of income such as 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 this 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.