What is the alternative minimum tax? And is it something taxpayers should be concerned about when filing their taxes?
Robert Powell of the Retirement Daily sat down with Jeffrey Levine, CPA and tax expert at Buckingham Strategic Wealth Partners, to answer this question and more.
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Quotes| The alternative minimum tax explained
Jeffrey Levine, Director of Planning, Buckingham Strategic Wealth
Jeffrey Levine, Director of Planning, Buckingham Strategic Wealth
Recommended reading: Incentive Stock Options
Video Transcript | Jeffrey Levine, CPA and tax specialist, Buckingham Strategic Wealth
Robert Powell: What should you know about the alternative minimum tax? Well here to talk taxes with us, Jeffrey Levine of Buckingham Wealth Partners. Jeffrey, what do people need to know about AMT?
Jeffrey Levin: Well, I think the most important thing people need to know about AMT today is that very few people actually have to pay for it. Now, for those wondering what even AMT is? I have never heard of this alternative minimum tax. Well, that’s actually what I like to think of as a fictional tax system. So when you do your taxes, you are actually doing two tax returns. You file an ordinary tax return, then another minimum tax return. And effectively, the alternative minimum tax return just starts with your regular return and then says, under this separate system, don’t allow those deductions. Instead of this change, let it be this. It is a separate set of rules. And then you end up paying the higher of those two tax bills.
Well, why do so few people pay this alternative minimum tax today? Simply, the changes made by the Tax Cuts and Jobs Act largely eliminated the alternative minimum tax for most individuals for a variety of reasons. First, they increased the amount of the exemption. They also increased the phase-out range where this exemption starts to fade. And perhaps, one of the biggest culprits, if you will, of causing the AMT, which was high state and local income taxes, which was significantly reduced due to our current cap $10,000 on state and local tax deductions.
Now, the last thing people should know is that just because you don’t pay it today doesn’t mean you won’t pay it forever. Because if things don’t change or are not extended by then, from 2026 we revert to the previous rules and many more individuals will find themselves subject to the alternative minimum tax at this moment.
Robert Powell: OK. Say, for example, you file your tax return. You don’t know you were subject to AMT, but you were. What happens then?
Jeffrey Levin: Well, you pay the higher bill. That’s it. You always pay more. So if your AMT bill is more than your ordinary tax, you pay AMT. If your ordinary tax is higher than the AMT, you pay ordinary tax. And in some circumstances, the difference will be a permanent difference. In other words, the AMT rules will say that is the rule for that particular deduction. You just don’t understand, in which case you never get those dollars back. There are also some differences between AMT and ordinary tax in terms of when you pay tax on certain things. And in those situations, you could end up with an alternative minimum tax credit that may actually reduce your tax liability in future years. So it is worth keeping track there.
And if you’re wondering, you said, Jeff, I’m unlikely to pay that AMT today. What is the most likely trigger? The most likely trigger is those who exercised, say, incentive stock options, right? Incentive Stock Options or who receive these incentive stock options are, in most cases today, the main trigger for the alternative minimum tax. It’s not the only one, but if you have ISOs, incentive stock options, alternative minimum tax is something that should always be high on your radar.
Editor’s Note: Content has been reviewed for tax accuracy by a TurboTax CPA expert.
Zach Faulds contributed to this article and produced the associated video and/or graphics.
