Alternative minimum tax, or AMT, is a second method of calculating federal income tax payable. The simple explanation of why the AMT exists is to ensure that high earners with many itemized deductions pay their fair share of taxes.
With that in mind, here’s a quick guide to how AMT works, how much you may have to pay if AMT affects you, and why it’s likely habit affect you in 2020.
Image source: Getty Images.
What is your AMT taxable income?
You can calculate your alternative minimum taxable income on IRS Form 6251, but here is the general idea:
- Start with your taxable income from your Form 1040.
- Next, add back your standard deduction or certain itemized deductions, such as the deduction for state and local taxes (SALT deduction).
- Add some deductions for investments and businesses. This list is quite long, but some of the most common items are investment interest, net operating losses, exercise of incentive stock options, and amortization.
It is worth noting that some itemized deductions are still permitted for AMT purposes. For example, you can still use the mortgage interest deduction, medical expense deduction, and charitable donation deduction.
The good news is that if you use tax preparation software, like most people, it will do this calculation for you. However, it’s still important to know how it works, so if you’re affected by AMT, you’ll understand why.
2020 Alternative Minimum Tax Exemptions
Once you have calculated your alternative minimum taxable income, you can apply an exemption. Think of this as the standard deduction for AMT purposes. Here are the 2020 AMT exemptions by filing status – I’ve also included the 2019 exemptions for reference and comparison.
|
Tax return status |
AMT 2019 exemption amount |
AMT 2020 exemption amount |
|---|---|---|
|
Single or head of household |
$71,700 |
$72,900 |
|
Married Filing Jointly |
$111,700 |
$113,400 |
|
Groom filing separately |
$55,850 |
$56,700 |
Data source: IRS.
It is important to point out that not everyone can deduct the AMT exemption from their alternative minimum taxable income. Specifically, if your income exceeds the annual phase-out threshold set by the IRS, your exemption is reduced by $1 for every $4 of alternative minimum taxable income that exceeds the applicable threshold, and if your income is too high , the AMT exemption may disappear completely. .
|
Tax return status |
Elimination threshold 2019 |
Elimination threshold 2020 |
|---|---|---|
|
Married Filing Jointly |
$1,020,600 |
$1,036,800 |
|
All the others |
$510,300 |
$518,400 |
Data source: IRS.
Alternative minimum tax brackets for 2020
Unlike the standard US tax system, which has seven marginal tax rates, or “brackets”, the alternative minimum tax system has only two. The rates are 26% and 28%, and here’s how they’re applied to determine your alternative minimum tax in 2020.
|
Filing status |
26% AMT tax rate |
28% AMT tax rate |
|---|---|---|
|
Groom filing separately |
IMAI up to $98,950 |
IMAI greater than $98,950 |
|
All other registrants |
AMTI up to $197,900 |
IMTA greater than $197,900 |
Data source: IRS.
And if you need the AMT 2019 tranches (for the tax return you will file in 2020), here they are:
|
Filing status |
26% AMT tax rate |
28% AMT tax rate |
|---|---|---|
|
Groom filing separately |
IMAI up to $95,550 |
IMTA greater than $95,550 |
|
All other registrants |
AMTI up to $191,100 |
IMTA greater than $191,100 |
Data source: IRS.
Finally, it’s worth mentioning that your federal income tax is calculated twice a year – once with the standard system and once with the AMT – and you will pay the higher of the two. In most cases (especially for middle-class Americans), the standard system results in a significantly higher tax bill thanks to the relatively large AMT exemptions.
TN no longer affects as many people as it used to
Prior to the implementation of the Tax Cuts and Jobs Act in 2018, AMT was very different. Specifically, the income thresholds at which the AMT came into effect were never indexed to inflation, so over time the tax began to apply to more households. – including many middle-class households it was never intended to affect. Additionally, there were many more potential itemized deductions than there are today.
The Tax Cuts and Jobs Act made some major changes that affected AMT:
- The amount of income that taxpayers can exclude from their AMT taxable income has increased and is now indexed annually to inflation.
- The income thresholds at which the AMT exemption begins to disappear have increased considerably.
- Many itemized deductions have been eliminated, removing some major AMT triggers.
- US tax brackets are generally lower than they used to be, but AMT tax brackets have not changed.
Thanks to higher AMT exemptions and phase-outs, as well as generally lower marginal tax brackets in the United States and the dramatic reduction in itemized deductions resulting from the Tax Cuts and employment, the alternative minimum tax affects very few people these days. Indeed, while 5 million households paid the AMT in 2017, this number fell to 200,000 in 2018, the first year under the new tax law. Some tax practitioners have reported that the AMT now primarily affects taxpayers who have exercised a significant number of incentive stock options.
That said, when preparing your 2020 tax return, your federal income tax will be calculated in two ways: the standard method and the AMT method. And you will pay the higher amount.
