Alternative Minimum Tax

The Alternative Minimum Tax, or AMT, is a parallel tax system. Every taxpayer is responsible for paying the higher of the regular tax or the minimum tax. The difference between the two tax calculations is calculated on IRS Form 6251 (pdf) and using Instructions for Form 6251. If the minimum tax is higher, the difference between the two tax rates is added to your Form 1040 as an additional alternative minimum tax.

The alternative minimum tax began as a way to ensure that taxpayers pay at least a minimum amount of tax. The AMT has a completely different set of calculations than the regular tax. For the regular tax, you add up your total income, subtract out various deductions and personal exemptions, then calculate the tax. Against the regular tax you can claim various credits to reduce your tax even further. The AMT, however, does not allow the standard deduction, personal exemptions, or certain itemized deductions. Also some income which is not subject to the regular tax is added for AMT purposes. Your tax under AMT rules may be higher than your tax under regular tax rules.

AMT Adjustments

When calculating the alternative minimum tax, various adjustments are made. Some income is added which is not subject to the regular tax. Some deductions are adjusted downwards or eliminated entirely.

The following items may trigger an AMT liability:

• Itemized deductions for state and local taxes, medical expenses, and miscellaneous expenses
• Mortgage interest on home equity debt
• Accelerated depreciation
• Exercising (but not selling) incentive stock options
• Tax-exempt interest from private activity bonds
• Passive income or losses
• Net operating loss deduction
• Foreign tax credits
• Investment expenses

This list is not comprehensive, but reflects the typical adjustments I see that can trigger an AMT liability. Typically, the alternative minimum tax eliminates most or exactly all of the regular tax savings from the above-mentioned deductions.

For a comprehensive discussion of all the AMT adjustments and tax planning strategies, see chapter 23 of J.K. Lasser's Your Income Tax. Another top-notch resource is chapter 14 of the PriceWaterhouseCoopers Guide to Tax and Financial Planning which provides a checklist of fourteen strategies for minimizing the AMT.

AMT Exemption Amounts for 2007

The AMT has standard exemption amounts. For 2007, the exemption amounts are:

• $44,350 for single and head of household filers,
• $66,250 for married people filing jointly and for qualifying widows or widowers, and
• $33,125 for married people filing separately.

AMT Exemption Amounts for 2008

The AMT exemption amounts increased slightly for 2008. As a result, fewer taxpayers may be subject to the alternative minimum tax than in 2007. The AMT exemption amounts for 2008 are:

• $46,200 for single and head of household filers,
• $69,950 for married people filing jointly and for qualifying widows or widowers, and
• $34,975 for married people filing separately.

AMT Exemption Amounts for 2009

Congress revised the AMT exemption amounts for 2009 as part of the American Recovery and Reinvestment Act. The revised exemption amounts are higher than they were scheduled to be, thereby preventing approximately 28 million middle-income filers from having to pay the AMT. The AMT exemption amounts for 2009 are:

• $46,700 for single and head of household filers,
• $70,950 for married people filing jointly and for qualifying widows or widowers, and
• $35,475 for married people filing separately.

AMT Exemption Amounts for 2010

Legislated as part of the Tax Relief Act of 2010:

• $47,450 for single and head of household filers,
• $72,450 for married people filing jointly and for qualifying widows or widowers, and
• $36,225 for married people filing separately.

AMT Exemption Amounts for 2011

Legislated as part of the 2010 Tax Relief Act:

• $48,450 for single and head of household filers,
• $74,450 for married people filing jointly and for qualifying widows or widowers, and
• $37,225 for married people filing separately.

AMT Exemption Amounts for 2012

Legislated as part of the American Taxpayer Relief Act:

• $50,600 for single and head of household filers,
• $78,750 for married people filing jointly and for qualifying widows or widowers, and
• $39,375 for married people filing separately.

AMT Exemption Amounts for 2013

Indexed for inflation in Revenue Procedure 2013-15:

• $51,900 for single and head of household filers,
• $80,800 for married people filing jointly and for qualifying widows or widowers, and
• $40,400 for married people filing separately.

AMT Tax Rates

The exemption amounts mean that this amount of AMT taxable income is not subject to the AMT. Income over these amounts may be subject to AMT. Unlike the ordinary tax rates, the AMT has only two tax brackets of 26% and 28%. The AMT tax rate is assessed only on AMT income over the exemption amount.

For 2013, the threshold where the 26% AMT tax bracket ends and the 28% AMT tax bracket begins is:

• $89,750 : for married filing separately, and
• $179,500 : for any other filing status.

Quick Check to See if You are Subject to AMT

The Internal Revenue Service has an online calculator to help you figure out if you are subject to the alternative minimum tax. It's called the AMT Assistant for Individuals.

There's also a fairly quick worksheet in the Instructions for Form 1040. You can use this worksheet to determine if you'll need to fill out the longer Form 6251 to compute your alternative minimum tax.

Most software will compute the alternative minimum tax automatically. Individuals should review the actual tax form to understand which income or deductions are causing the AMT liability. For many taxpayers, deductions for state income tax, property tax and home equity interest and income from incentive stock options are the main causes.

AMT Tax Planning

Devising tax strategies around the alternative minimum tax can be tricky, since the AMT often adjusts for various deductions and credits. In general, tax professionals recommend the following planning tips.

Seek reimbursements from your employer for business expenses incurred as an employee. These expenses are part of the miscellaneous itemized deductions, which are added back to your income for AMT purposes. Having your employer reimburse you for those expenses, by contrast, is a tax-free event to you, and prevents a higher AMT adjustment.

Review your state tax withholding so that you pay in enough so you don't owe but not enough that you substantially overpay. This will keep your state tax deduction to as low as possible, thereby keeping your AMT adjustments as small as possible.

Pay your property taxes when due instead of prepaying your next installment by the end of the year. Again, this will keep your deduction for state and local taxes as low as possible.

Sell exercised incentive stock options in the same year you exercise them. When you exercise & sell incentive stock options in the same year, you'll be subject to the regular tax on the income but not the AMT. However, if you exercise but not sell, the value of the exercised options because income for AMT purposes.