What is the alternative minimum tax (AMT)?
The alternative minimum tax (AMT) is an income tax calculated using an different set of rules meant to ensure that certain taxpayers pay at least a minimum of tax. The AMT calculations limit certain tax benefits for some taxpayers so that their income tax liabilities are higher. Those taxpayers, who typically 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.
How is the AMT calculated?
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 the ax in the AMT calculations.)
- Once you have that AMT version of your taxable income, subtract the AMT exemption amount. Here are the AMT exemption amounts for 2019:
Single Married, filing jointly The AMT exemption amount for certain individuals under 24 equals their earned income plus $7,600. Exemption amount $71,700 $111,700 Income at which exemption begins to phase out $510,300 $1,020,600
- 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.
Don’t worry 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).
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, as are breaks for investment fees and interest. A range of business items are 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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How to avoid the 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.