Alternative Minimum Tax

Alternative Minimum Tax: How Does it Affect Taxpayers?

Alternative Minimum Tax (AMT) is another way to calculate how much income tax you owe. Taxpayers whose income is above a certain amount have to calculate their tax liability twice. First, using the regular income tax rules, and second, using AMT rules. The AMT is a separate tax system that ensures that high-income taxpayers pay a minimum amount of tax, even if they use deductions and credits to reduce their regular income tax liability

Who is affected by the AMT?

A version of the AMT was created in 1969 called the add-on minimum tax to ensure the wealthy paid their fair share of taxes. At the time the Internal Revenue Service (IRS) discovered that 155 wealthy taxpayers had not paid taxes because they got tax breaks that the average American did not qualify for. This tax was applied only to certain items that were not as significantly taxed in the regular income tax system, among which the biggest one was capital gains. The AMT was designed to close these loopholes and make sure that everyone paid their fair share.

The AMT has been expanded over time to include a wider range of items. Today, taxpayers whose income is above a certain amount and comes from certain sources need to pay an AMT. Some of the sources include: 

Tax preference items: These are items that are generally received tax-free, but are added back to income for AMT purposes. Examples include interest from private activity bonds which have been previously exempted, and accelerated depreciation on certain leased personal property. 

How does AMT work?

First, you calculate your regular taxable income.

Then complete the AMT Form 6251 to apply any adjustments or preferences and the alternative minimum taxable income (AMTI) is calculated. 

AMT exemption is subtracted from the AMTI and the tentative minimum tax payable is calculated. 

If the tentative minimum tax exceeds the regular tax liability for the year, you have to pay the full tentative minimum tax. 

Every year, the AMT changes to accommodate inflation rates. There are two AMT rates for 2022 and 2023 – 26% and 28%. 

For the year 2022-23 (for taxes due in April 2023, or October 2023 if you filed for an extension), the AMT exemption amounts are as follows:

SingleMarried (joint filing)Married (separate filing)

For 2023-24 (taxes due in April 2024, or October 2024 is you filed for an extension), these are the exemption amounts:

SingleMarried (joint filing)Married (separate filing)

If you are among the group to whom AMT may be applicable, you could calculate your AMT using tax software that calculates both taxes automatically. 

Can I avoid the AMT?

There are a few things you can do to avoid the AMT:

  • Reduce your taxable income. This can be done by increasing your deductions or by contributing to retirement accounts.
  • Increase your AMT exemption. This can be done by itemizing your deductions or by making certain tax-deductible contributions.
  • Take advantage of the AMT credit. The AMT credit is a tax credit that can be used to offset your AMT liability.

If you are subject to the AMT, you should consult with a tax advisor to discuss your options.

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