TIP: If you owe AMT, you may be able to lower your total tax (regular tax plus AMT) by claiming itemized deductions on Form 1040, even if your total itemized deductions are less than the standard deduction. This is because the standard deduction is not allowed for the AMT and, if you claim the standard deduction on Form 1040, you cannot claim itemized deductions for the AMT. Source: 2023 Instructions for Form 6251, Alternative Minimum Tax Individuals The Tax Cuts and Jobs Act, signed into law in December 2017, substantially increases the AMT exemptions and exemption phaseout thresholds from 2018 to 2025 (with inflation adjustments after 2018). After 2025, the amounts revert to their pre-2018 levels and are substantially reduced. | | The Alternative Minimum Tax (AMT)
When it comes to federal income tax, there are few subjects capable of causing as much confusion as the AMT. The Tax Cuts and Jobs Act substantially increased the AMT exemptions and exemption phaseout thresholds for 2018 to 2025.
Here's a quick guide to understanding the AMT. What is the AMT?
The AMT is essentially a separate federal income tax system
with its own tax rates, and its own set of rules governing the recognition and
timing of income and expenses. If you're subject to the AMT, you have to
calculate your taxes twice — once under the regular tax system and again under
the AMT system. If your income tax liability under the AMT is greater than your
liability under the regular tax system, the difference is reported as an
additional tax on your federal income tax return. If you're subject to the AMT
in one year, you may be entitled to a credit that can be applied against
regular tax liability in future years.
How do you know if you're subject to the AMT?
Part of the problem with the AMT is that, without doing some
calculations, there's no easy way to determine whether or not you're subject to
the tax. Key AMT "triggers" have included the number of personal exemptions you
claim (no longer applicable from 2018 to 2025), your miscellaneous itemized deductions (no longer applicable from 2018 to 2025), and your state and local tax
deductions. So, for example, if you have a large family and live in a high-tax
state, there's a good possibility you might have to contend with the AMT. IRS
Form 1040 instructions include a worksheet that may help you determine whether
you're subject to the AMT (an electronic version of this worksheet is also
available on the IRS website), but you might need to complete IRS Form 6251 to
know for sure.
Common AMT adjustments
It's no easy task to calculate the AMT, in part because of
the number and seemingly disparate nature of the adjustments that need to be
made. Here are some of the more common AMT adjustments:
- Standard deduction and personal exemptions: The federal
standard deduction, generally available under the regular tax system if you
don't itemize deductions, is not allowed for purposes of calculating the AMT.
Nor could you take a deduction for personal exemptions for purposes of calculating the AMT when personal exemptions were still available under the regular tax system in 2017.
- Itemized deductions: Under the AMT calculation, no
deduction is allowed for state and local taxes paid, or for certain
miscellaneous itemized deductions. In 2018 to 2025, those miscellaneous itemized deductions are not allowed under the regular tax system as well. You can only deduct qualifying residence interest (e.g.,
mortgage or home equity loan interest) to the extent the loan proceeds are used
to purchase, construct, or improve a principal residence.
In 2018 to 2025, this is also the rule under the regular tax system.
- Exercise of incentive stock options (ISOs): Under the
regular tax system, tax is generally deferred until you sell the acquired
stock. But for AMT purposes, when you exercise an ISO, income is generally
recognized to the extent that the fair market value of the acquired shares
exceeds the option price. This means that a significant ISO exercise in a year
can trigger AMT liability. If ISOs are exercised and sold in the same year,
however, no AMT adjustment is needed, since any income would be recognized for
regular tax purposes as well.
- Depreciation: If you're depreciating assets (for example,
if you're a sole proprietor and own an asset for business use), you'll have to
calculate depreciation twice — once under regular income tax rules and once
under AMT rules.
AMT exemption amounts
While the AMT takes away personal exemptions (no longer applicable from 2018 to 2025) and a number of
deductions, it provides specific AMT exemptions. The amount of AMT exemption
that you're entitled to depends on your filing status.
Your exemption amount, however, begins to phase out once
your taxable income exceeds a certain threshold. (Specifically, your exemption amount is reduced by $0.25 for every $1.00 you have in taxable income over the threshold amount). AMT Exemption Amounts by Filing
Status | 2024 | 2025 |
---|
Married filing
jointly | $133,300 | $137,000 |
---|
Single or head of
household | $85,700 | $88,100 |
---|
Married filing
separately | $66,650 | $68,500 |
---|
AMT Exemption Phaseout Threshold | 2024 | 2025 |
---|
Married filing
jointly | $1,218,700 | $1,252,700 |
---|
Single or head of
household | $609,350 | $626,350 |
---|
Married filing
separately | $609,350 | $626,350 |
---|
Technical Note:
In the context of AMT exemption amounts and tax rates,
taxable income really refers to your alternative minimum taxable income (AMTI).
Your AMTI is your regular taxable income increased or decreased by AMT
preferences and adjustments.
Technical Note:
When it comes to the phaseout of AMT exemption amounts, a special calculation applies to individuals who are married filing a separate federal income tax return. These individuals have to add an additional amount to their AMTI before calculating the exemption phaseout. AMT rates
Under the AMT, the first $239,100 (for 2025, $232,600 for 2024) of your taxable income is
taxed at a rate of 26%. If your filing status is married filing separately,
the 26% rate applies to your first $119,550 (for 2025, $116,300 for 2024) in taxable income. Taxable income
above this amount is taxed at a flat rate of 28%.
The lower maximum tax rates that generally apply to long-term capital
gain and qualifying dividends apply to the AMT calculation as well. So, even
under AMT rules, a maximum rate of 20%, 15%, or 0% (depending on your taxable income) generally applies for 2024 and 2025. However, long-term capital gain and qualifying dividends are
included when you determine your taxable income under the AMT system. That
means large capital gains and qualifying dividends can push you into the
phaseout range for AMT exemptions, and can indirectly increase AMT exposure.
Summing up
Owing AMT isn't the end of the world, but it can be a very
unpleasant surprise. It also turns a number of traditional tax planning
strategies (e.g., accelerating deductions) on their heads, so it's a good idea
to factor in the AMT before the end of the year, while there's still time to
plan.
If you think you might be subject to the AMT, it may be
worth sitting down to discuss your situation with a tax professional.
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