What is the Alternative Minimum Tax (AMT)?
An alternative minimum tax (AMT) places a floor on the percentage of taxes a filer must pay to the government, regardless of how many deductions or credits the filer can claim.
The United States currently has an alternative minimum tax for taxpayers who earn above certain thresholds.
The AMT recalculates the income tax after adding certain tax preference elements into the adjusted gross income. The AMT uses a separate set of rules to calculate taxable income after allowable deductions. The preferential deductions are added back to the taxpayer’s income to calculate their alternative minimum taxable income (AMTI), then the AMT exemption is subtracted to determine the final taxable figure.
How the alternative minimum tax (AMT) works
The difference between a taxpayer’s AMTI and their AMT exemption is taxed using the relevant rate schedule. This gives the Provisional Minimum Tax (TMT). If the TMT exceeds the taxpayer’s normal tax for the year, he pays the normal tax and the amount by which the TMT exceeds the normal tax. In other words, the taxpayer pays the entire TMT.
Key points to remember
- The AMT ensures that certain taxpayers pay their fair share or at least the minimum.
- It does not come into play until the income has reached a certain level. For 2022, that’s $118,100 for couples filing jointly.
- In 2012, Congress passed the American Taxpayer Relief Act of 2012 which indexed the exemption amount to inflation to prevent middle-income taxpayers from experiencing bracket creep.
What is the alternative minimum tax rate?
There are two alternative minimum tax rates, 26% and 28%. The 26% rate applies to income up to $197,900 above the exempt income for the filer’s tax status. The 28% rate applies to income above this level.
A taxpayer who has a high income and uses large tax breaks may owe a lower percentage under the standard rules. If so, the taxpayer is forced to recalculate the taxes owed under the alternative minimum tax system, which removes some of these tax benefits.
The taxpayer will owe the greater amount.
AMT exemption amounts
For the 2021 tax year, the AMT exemption for individual filers is $73,600. For married joint filers, the figure is $114,600. For the 2022 tax year, the figures are $75,900 for individuals and $118,100 for couples.
Taxpayers should complete Form 6251 to see if they might owe AMT. First, they get to subtract the exemption amount. If their AMT is less than the exemption, they do not have to pay the AMT.
It is important to note, however, that taxpayers with AMTI above a certain threshold are not eligible for the AMT exemption. For the 2021 tax year, the phase-out starts at $523,600 for individuals and $1,047,200 for couples filing jointly. For the 2022 tax year, it begins to disappear at $539,900, or $1,079,800 for couples filing jointly.
Purpose of AMT
AMT is designed to prevent taxpayers from escaping their fair share of tax liability through tax relief. However, the structure was not indexed to inflation or tax cuts. This can lead to bracket slippage, a condition in which upper-middle-income taxpayers are subject to this tax instead of just the wealthy taxpayers for whom the AMT was invented. In 2012, however, Congress passed a law indexing the amount of the AMT exemption to inflation.
To determine if they owe AMT, individuals can use tax software that automatically performs the calculation, or they can complete IRS Form 6251. This form takes into account medical expenses, mortgage interest, and several other miscellaneous deductions for help filers determine if their deductions are beyond an aggregate limit set by the IRS.
The form also requests information on certain types of income such as tax refunds, investment interest and interest from private activity bonds, as well as figures for capital gains or losses related to the disposition of goods. The IRS has specific formulas in place to determine what portion of this income and deductions filers should note on Form 6251, and it uses another set of formulas to determine how these numbers lead to the AMTI.