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The Alternative Minimum Tax, or AMT, is a different, but parallel, method of calculating a taxpayer’s bill. It applies to people with incomes above a certain level and aims to close loopholes that allow them to reduce or eliminate their tax payments. It is adjusted each year for inflation.
How the AMT works
AMT has its own set of rates (26 percent and 28 percent) and requires a separate calculation. Basically, this is the difference between your regular tax bill, based on regular tax rates, and your AMT bill, determined by completing IRS Form 6251: Alternative Minimum Tax – Individuals. When there is a difference, you may have to pay the AMT amount in addition to your regular tax.
The AMT increases the amount of taxable income. It adds items that are not taxed on standard tax rates and rejects or reduces many common tax breaks used each year by individual taxpayers to lower their IRS bills.
AMT exemption amounts for 2020
To be required to pay AMT, you must have earned more than the minimum level shown in the table below.
| Filing status | 2o20 minimum AMT tax income | 2o19 AMT minimum tax income |
|---|---|---|
| Single or head of family | $ 72,900 | $ 71,700 |
| Married, separate deposit | $ 56,700 | $ 55,850 |
| Married, joint filing | $ 113,400 | $ 111,700 |
Who must pay the AMT?
Anyone who meets the minimum income levels in the table above may be subject to AMT. However, reaching these levels does not automatically trigger AMT. You can fill out IRS Form 6251 by hand, use tax software, or hire a tax preparer to determine if you owe the AMT and, if so, how much you owe.
The IRS has set income levels to determine the rate you are charged for your AMT. If your income is below the level shown, you are taxed at the rate of 26%. If your income exceeds the stated level, you are taxed at a rate of 28 percent.
| Filing status | AMT 2020 tax rate income level | AMT 2019 tax rate income level |
|---|---|---|
| Single or head of family | $ 197,900 | $ 194,800 |
| Married, separate deposit | $ 98,950 | $ 97,400 |
| Married, joint filing | $ 197,900 | $ 194,800 |
This means that for a single person who earned more than $ 72,900 in 2020, but less than $ 197,900, the AMT rate is 26%. If that person earned more than $ 197,900, the AMT tax rate drops to 28%.
Even for high incomes, the AMT gradually increases to 25 cents per dollar earned once the income reaches a threshold. See the table below for this year’s threshold.
| Filing status | AMT 2020 elimination threshold | AMT 2019 elimination threshold |
|---|---|---|
| Single or head of family | $ 518,400 | $ 510,300 |
| Married, separate deposit | $ 518,400 | $ 510,300 |
| Married, joint filing | $ 1,036,800 | $ 1,020,600 |
Impact of the AMT on your eligibility for tax breaks
With the AMT, many of the items you could deduct for your standard taxes no longer apply. Under AMT:
- You do not benefit from the standard deduction or personal exemptions.
- You cannot deduct national and local taxes.
- Medical expenses must exceed 10 percent of your gross income to be deducted.
- Various itemized deductions, which must exceed 2 percent of your adjusted gross income under the regular tax system, are not allowed for AMT.
- While mortgage interest on your primary and secondary residence is still AMT deductible, interest on home equity loans is limited. It can only be deducted if the money is only used to pay for home renovations.
- Property taxes are also denied as deductions under the AMT.
- Some tax credits that reduce your tax payable do not reduce what you owe under the AMT. Once you add those unauthorized credits back and run the numbers, you could be subject to a larger IRS bill if your taxable income exceeds the annual AMT exemption amount for your filing status.
The additional tax breaks not authorized under the AMT that mainly affect high income earners are:
- Incentive stock options.
- Intangible drilling costs.
- Interest exempt from tax on certain private activity obligations.
- Depletion and accelerated depreciation of certain movable or rented property.
Determining your financial responsibility due to AMT can be complicated. Tax software or a tax professional may be the best way to determine your status. Once you’ve completed this year’s tax return, seek advice from an accountant or tax professional on ways to potentially reduce your tax liability in the future.
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