Alternative Minimum Tax (AMT): Definition, Rates, Who Pays in 2022-2023
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What is alternative minimum tax (AMT)?
The alternative minimum tax, or AMT, is calculated using a different set of rules meant to ensure certain high-income taxpayers pay at least a minimum amount of income tax. AMT calculations limit certain breaks for some taxpayers so their tax bill is higher.
How does alternative minimum tax work?
Incomes above the annual AMT exemption amounts typically trigger the alternative minimum tax. AMT payers, who generally have relatively high incomes, essentially calculate their income tax twice — under regular tax rules and under the stricter AMT rules — and then pay the higher amount owed.
Calculating AMT is different from calculating your tax under regular IRS rules. Certain types of income and deductions that you may exclude or deduct when figuring your normal taxes may need to be added back into your taxable income. For example, AMT calculations require you to include income from an incentive stock option that was exercised and any refunds you received for state and local income taxes. See the instructions for Form 6251 for more details,
via Datalign Advisory
What are the AMT tax rates?
Taxpayers who have incomes that exceed the AMT exemption may be subject to the alternative minimum tax. In 2022 and 2023, AMT rates are 26% or 28%.
2022 AMT exemption amounts
(for taxes due in April 2023 or in October 2023 with an extension)
Single | Married, filing jointly | Married, filing separately | |
|---|---|---|---|
Exemption amount | $75,900 | $118,100 | $59,050 |
Income at which exemption begins to phase out | $539,900 | $1,079,800 | $539,900 |
The AMT exemption amount for certain individuals under 24 equals their earned income plus $8,200. | |||
2023 AMT exemption amounts
(for taxes due in April 2024 or in October 2024 with an extension)
Single | Married, filing jointly | Married, filing separately | |
|---|---|---|---|
Exemption amount | $81,300 | $126,500 | $63,250 |
Income at which exemption begins to phase out | $578,150 | $1,156,300 | $578,150 |
The AMT exemption amount for certain individuals under 24 equals their earned income plus $8,800. | |||
How do I calculate alternative minimum tax (AMT)?
The alternative minimum tax runs parallel to the standard tax system, but it has a different tax rate structure and eliminates some common tax breaks. This is generally how the calculation works:
Calculate your taxable income, but with fewer tax exclusions and tax deductions, as dictated by the AMT rules (IRS Form 6251 has the details on which tax breaks get eliminated in the AMT calculations.)
Once you have that AMT version of your taxable income, subtract the AMT exemption amount.
Multiply what’s left by the appropriate AMT tax rates. The AMT has two tax rates: 26% and 28%. (Compare these to the seven federal income tax brackets, ranging from 10% to 37%.) Which rate you pay depends on how high your AMT taxable income is. (Again, IRS Form 6251 has the details.)
Subtract the AMT foreign tax credit, if you qualify for it. What’s left is your income tax under the AMT rules.
If your income tax under the AMT rules is higher than your income tax under the regular rules, you pay the higher amount. This basically determines who has to pay alternative minimum tax.
What tax breaks do you lose under the AMT?
Taxpayers typically look for deductions, credits and other ways to reduce their taxable income. Under the AMT, you may not be able to take as many of these breaks.
Deductions for state and local taxes (such as property taxes) are targets, for example. A range of business items are also curtailed.
Investors also could face AMT. Long-term capital gains and certain dividends could push your income up into the AMT system.
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Do I have to pay alternative minimum tax?
There isn’t much you can do to avoid paying AMT if you find out you have to pay it when filing your return. But figuring out whether you are vulnerable to the AMT and what triggers it can help you plan ahead. Lowering your adjusted gross income by maxing out contributions to a 401(k), IRA or health savings account can help, for example, as can keeping an eye on the size of your long-term capital gains.
If you suspect that you might owe AMT, consult a tax expert to help you with the additional paperwork and reduce or avoid the tax.
If this is giving you a headache ...
Here’s some welcome news: Most good tax software will do both sets of calculations automatically. As you enter your information, the program will run the numbers in the background according to both the regular tax system (using Form 1040) and AMT rules (using Form 6251).
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