IRS Form 6251, Alternative Minimum Tax-Individuals, determines the amount of alternative minimum tax (AMT) you may owe. To ensure that wealthy individuals pay their fair share of income tax, Congress has mandated a alternative minimum tax in 1969. You must pay alternative minimum tax if you report taxable income above certain income threshold exclusions. If this applies to you, your taxes are handled by both AMT and the traditional tax system, leaving you to pay the higher amount.
A Financial Advisor can help you create a tax strategy to minimize your taxes.
Understanding Form 6251 and Alternative Minimum Tax (AMT)
To try to ensure that all taxpayers pay their fair share of income taxes, the United States has implemented an AMT for taxpayers who earn above a certain income threshold. The AMT sets a floor on the percentage of taxes a filer pays to the federal government, regardless of the dollar amount of their exclusions, deductions, or tax credits.
The AMT is calculated on IRS Form 6251 with your federal tax return. It uses a separate set of rules from the normal way of calculating taxable income. There are tax preference elements that the AMT adds to your taxable income to arrive at your alternative minimum taxable income (AMTI). So essentially the AMT limits certain deductions, credits, and exclusions that help taxpayers in the traditional tax system. The result is a higher Adjusted Gross Income (AGI) that takes into account the types of income that normally pass through untaxed.
The AMT tax rates are 26% and 28%. If you are liable for AMT, you pay it instead of your usual income tax. You calculate your income tax twice, once under ordinary tax rules and then again under AMT rules. You pay the higher amount of the two.
AMT was created by Congress in 1969 when it realized that some wealthy taxpayers were paying little or no income tax due to tax breaks. Over the years, they realized that bracket drift was causing upper middle class taxpayers to pay AMT instead of only wealthy taxpayers due to tax cuts and inflation. In 2015, Congress passed another law indexing AMT Exemption amount, or level of income, to inflation.
Tax preference items
Tax preference items are tax deductions, credits, and exclusions that are added back to your taxable income when you trigger AMT by exceeding the income exclusion. They are listed on IRS Form 6251. The three main tax preference items are:
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Interest on private activity municipal bonds
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Excess intangible drilling costs for oil and gas
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Eligible Exclusions for Small Business Stocks
The other tax preference elements that you must add to the AMTI if you trigger the AMT are:
This is not a complete list. A full list can be found at IRS Form 6251.
What triggers TN?
AMT is generally triggered by filers whose income exceeds the annual AMT exemption for that year. For the 2021 tax year (which you file in 2022), the exemption is $73,000 for singles and $114,600 for married couples. For the 2022 tax year (which you file in 2023), the exemption is $75,900 for singles and $118,100 for married couples.
To calculate the amount of income on which you have to pay AMT, subtract your exemption from your income calculated according to the AMT rules and you will find the amount of income on which you will have to pay AMT, which also means a higher tax rate of 26% or 28%.
The exemption begins to disappear when, for the 2021 tax year, you reach $523,600 as a single filer and $1,047,200 for a married couple. For 2022, the exemptions are $539,900 and $1,079,800 respectively. Once you reach these income levels, your income exemption begins to phase out.
Sample AMT Calculation Using Form 6251
The AMT system is quite complex, as it has a number of different variations of the traditional income tax system in the United States. Here is a step-by-step breakdown of how Form 6251 is used to calculate your AMT liability:
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Enter your taxable income on IRS Form 1040 or 1040-SR from line 15 after subtracting lines 12 and 13 from line 11. Enter the result on line 1 of Form 6251.
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From line 2a to line 3, enter an amount for everything that applies to you. Add all amounts from line 1 to line 3.
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Enter the total on line 4. This is your AMEI.
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Multiply your AMTI by the appropriate tax percentage, either 26% or 28%, depending on where you are in the Form 6251 instructions.
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Subtract the foreign tax credit IMTA if you qualify.
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Compare your tax under ordinary tax rules to the tax on your AMTI and pay the higher amount.
Conclusion
IRS Form 6251 is a complex tax form and a complicated matter. If you are likely to be affected by the AMT, part of the reason may be that calculating the AMT causes you to lose many of the tax deductions, credits and exclusions you have. This will increase your taxable income, which will increase your tax rate on your AMTI. The highest AMT tax rate is 28% compared to 39.5% under regular tax rules. It may or may not help.
The purpose of the AMT is to prevent the wealthy from using excessive tax breaks to drastically reduce their tax liability. Due to its complexity, you may want to hire a tax accountant or financial advisor to help you complete it.
Tax advice
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Consider work with a financial advisor to prevent the triggering of the AMT. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your advisors at no cost to decide which one is best for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
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Capital gains are a possible element of tax preference when calculating AMTI. Use The SmartAsset Capital Gains Calculator to see how your capital gains affect your AMT.
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