Alternative Minimum Tax (AMT)

The Alternative Minimum Tax isn't something new; in fact, it first appeared on tax forms back in 1978.  The American Taxpayer Relief Act of 2012, or ATRA, significantly changed this tax, but its purpose is still confusing to many.

Alternative Minimum Tax Rules

The IRS tax code gives special treatment to certain kinds of income, and allows taxpayers to take deductions, or provides credits, for special expenses.  If an individual qualifies for too many of these exemptions, or tax credits, their overall liability may fall below a minimum threshold.  When that occurs, the alternative minimum tax, or AMT, applies.  This process ensures that taxpayers don't benefit too much from these special provisions, and they are paying their fair share, or a "minimum tax."

When a taxpayer qualifies for the AMT, they're directed to a special form that calculates their tax liability.  This form uses a different formula than the "standard" tax rate calculation.  Essentially, it adds back certain deductions taken against income.  Once the filer has gone through this calculation, they will pay the higher of their "standard" tax liability or the minimum tax.

Purpose of the AMT

The intention of the alternative minimum tax is to set a lower threshold rate of around 27% for some of the highest-earning individuals in the United States.  The AMT prevents these individuals from taking advantage of loopholes, which allow them to shelter a substantial amount of income from federal income taxes.  It also eliminates some of the benefits of what are called "tax preference" items including:

  • Accelerated depreciation rates
  • Long-term capital gains
  • Percentage depletion
  • Tax exempt income
  • Tax credits

In 2006, an estimated 3.8 million taxpayers were affected by the Alternative Minimum Tax.  By 2007, that number grew to 23 million taxpayers.  That's over a five-fold increase in just one year's time.  The ATRA substantially changed the number of filers subject to this process.

Recent Changes to the AMT

In the past, Congress would have to approve a temporary "patch" to increase the amount of income subject to this tax.  In 2011, only 4.3 million taxpayers owed AMT, down from a high of nearly 30 million.  The ATRA established a higher, permanent, exemption starting in 2012, and indexed the calculation of this tax (income and other parameters) for inflation.  In fact, an estimated 3.4 million individuals paid this tax in 2013.

The 2016 AMT exemption amounts include (a 26% minimum tax):

  • For individuals with a status of married filing jointly, or are a qualifying widow or widower, the exemption amount is $83,800.
  • For individuals with a status of unmarried individual (other than surviving spouse), the exemption amount is $53,900.
  • For individuals with a status of married filing separately, the exemption amount is $41,900.
  • The exemption for estates and trusts is now $23,900.

In 2016, a minimum 28% tax rate applies to the following:

  • For married individuals filing separate returns, all income above $93,150.
  • For married individuals filing joint returns, unmarried individuals (other than surviving spouse), and estates and trusts, all income above $186,300.

The 2017 AMT exemption amounts include (a 26% minimum tax):

 

  • For individuals with a status of married filing jointly, or are a qualifying widow or widower, the exemption amount is $84,500.
  • For individuals with a status of unmarried individual (other than surviving spouse), the exemption amount is $54,300.
  • For individuals with a status of married filing separately, the exemption amount is $42,250.
  • The exemption for estates and trusts is now $24,100.

 

In 2015, a minimum 28% tax rate applies to the following:

 

  • For married individuals filing separate returns, all income above $93,900.
  • For married individuals filing joint returns, unmarried individuals (other than surviving spouse), and estates and trusts, all income above $187,800.

 

Some of the adjustments and tax preference items include: itemized deductions, taxable state and local tax refunds, accelerated depreciation of certain property, certain tax exempt interest and the difference between the alternative minimum tax and a regular tax gain or loss on the sale of property, treatment of incentive stock options, and depletion allowances.

For more complete instructions, see the information contained in IRS Form 6251.

AMT Calculations

In addition to running through the normal, or standard, income tax calculations, the alternative minimum tax uses a second set of rules for determining taxable income as described in IRS publication 6251.  The outcome of those calculations is what's called a Tentative Minimum Tax, or TMT, which is compared to the income taxes owed using the "standard" method.

If this standard income tax owed is greater than the calculated TMT, then the individual owes income taxes based on the standard method.  However, if the Tentative Minimum Tax is greater than the standard tax calculation, the difference between the TMT and the standard method is added to the individual's "normal" tax liability.  This total amount is the amount of income taxes owed, and is referred to as the alternative minimum tax.

Sheltering from the Alternative Minimum Tax

Individuals looking to shelter from this tax, should adopt a strategy that will accelerate income, and defer deductions.  Some of the ways to accelerate income include:

  • Withdrawing money from a taxable IRA or 401(k) plan
  • Cashing in U.S. Savings bonds, Series EE
  • Taking a short-term capital gain on a stock position
  • Switching from tax-free bond holdings to taxable bonds
  • Closing out a certificate of deposit to take the interest income gain

Business owners can defer deductions by depreciating capital expenditures such as the purchase of office equipment instead of expensing the cost in the current year.

Finally, it's possible to delay the payment of certain deductible items to reduce the risk of paying the alternative minimum tax.  For example, in December 2016 it's possible to prepay real estate taxes due in January 2017.  This strategy allows the taxpayer to take the deduction in 2016, which lowers the overall liability, but may trigger a minimum tax.  This same strategy can also be applied to medical expenses and un-reimbursed business expenses.


About the Author - Alternative Minimum Tax (AMT) (Last Reviewed on November 1, 2016)