Click here to learn how recent tax reform has changed the alternative minimum tax.
The alternative minimum tax, or AMT, is a supplemental income tax in the United States designed to make sure that the wealthy pay their fair share of federal income taxes. The AMT allows fewer exemptions and deductions than the standard tax system, and certain taxpayers must calculate their taxes both ways and pay the higher amount.
What is the alternative minimum tax?
In a nutshell, the alternative minimum tax was implemented by Congress in 1969 after noticing that many high-income households were using so many deductions and other tax loopholes that they were paying no federal income tax whatsoever. The AMT was designed to make the tax system fairer, by ensuring that no matter how many deductions a wealthy household could claim, they would still be required to pay their fair share of federal income taxes.
The alternative minimum tax could add to your tax bill. Image source: Getty Images.
Determining your alternative minimum taxable income
Your taxable income calculated on your 1040 and your taxable income for AMT purposes are often two very different numbers. You can use part one of IRS Form 6251 to figure out your alternative minimum taxable income.
Part one of the form looks rather complex, but the idea is that you start with your adjusted gross income (AGI) after itemized deductions from your 1040, and then add back in a bunch of deductions and tax breaks that are not allowed for AMT purposes.
Just to name a few common examples, here are some of the deductions you would need to add back into your taxable income when calculating your AMT:
- State and local income taxes
- Real estate and personal property taxes
- Miscellaneous itemized deductions, such as employee business expenses
- Interest on home equity loans
- Deduction for a net operating loss
- The standard deduction, if you took it instead of itemizing
There are many other possibilities of deductions and other tax breaks you may need to add in. The point is that many of your deductible items are added back to your income, so your alternative minimum taxable income will generally be higher than your taxable income as calculated by the standard method.
It's important to mention that there are two major exceptions. You are still allowed to use the deductions for mortgage interest (but not on home equity loans), as well as charitable contributions, when calculating your AMT. Also, things that lower your adjusted gross income, such as IRA contributions, are not affected by the AMT calculation.
Alternative minimum exemptions, tax rates, and phase-outs
Once you've calculated your alternative minimum taxable income, you get to subtract a single exemption amount, which depends on your filing status. For the 2016 and 2017 tax years, here are the AMT exemptions:
|
Filing Status |
2016 Exemption |
2017 Exemption |
|---|---|---|
|
Single |
$53,900 |
$54,300 |
|
Married filing jointly |
$83,800 |
$84,500 |
|
Head of household |
$53,900 |
$54,300 |
|
Married filing separately |
$41,900 |
$42,250 |
Data source: IRS.
These exemptions begin to phase out above certain income levels. Specifically, if your alternative minimum taxable income (AMTI) is above a certain threshold, you lose $0.25 of your exemption for every dollar your AMTI exceeds that threshold.
|
Filing Status |
2016 Phase-out Threshold |
2017 Phase-out Threshold |
|---|---|---|
|
Single |
$119,700 |
$120,700 |
|
Married filing jointly |
$159,700 |
$160,900 |
|
Head of household |
$119,700 |
$120,700 |
|
Married filing separately |
$79,850 |
$80,450 |
Data source: IRS.
Much of the AMT is fairly complicated, however, the AMT tax brackets are not. While the standard tax system has seven brackets ranging from 10% to 39.6%, the AMT system has only two -- 26% and 28%. Below a certain income amount, the 26% rate is applied, and over that amount, the 28% rate is applied to the rest.
|
Filing Status |
2016 Threshold for 28% Rate |
2017 Threshold for 28% Rate |
|---|---|---|
|
Single |
$186,300 |
$187,800 |
|
Married filing jointly |
$186,300 |
$187,800 |
|
Head of household |
$93,150 |
$93,900 |
|
Married filing separately |
$186,300 |
$187,800 |
Data source: IRS.
An example of calculating AMT
This may seem rather complicated, especially if you've never had to calculate your alternative minimum tax before. So, let's take a look at an example to illustrate this.
Suppose that you're a single taxpayer and that your adjusted gross income after deductions for 2016 was $100,000 on your W-2. To calculate your alternative minimum taxable income, you add back in the following:
- $4,000 in state and local taxes
- $6,000 in real estate and property taxes
- $5,000 in deductible employee business expenses
This gives you an alternative minimum taxable income (AMTI) of $115,000. This is less than the $119,700 phase-out threshold, so you're entitled to subtract your entire AMT exemption of $53,900, which gives you $61,100.
This is far below the threshold for the 28% AMT tax rate, so the 26% rate would apply to this entire amount. 26% of $61,100 is $15,886, so this would be your calculated alternative minimum tax, also known as your tentative minimum tax. If this is greater than the income tax calculated on your 1040, you would pay this amount. If not, you would pay your originally calculated income tax.
