Who Has To Pay the AMT?
The IRS provides a fairly simple worksheet in its Instructions for Form 1040 that you can use to determine whether you have to fill out the longer Form 6251 to compute your alternative minimum tax. Most tax software programs compute the AMT for you automatically. If it turns out that you’re subject to the AMT, you might want to review the actual tax form to understand which income sources or deductions are causing your AMT liability. Many taxpayers find that deductions for state tax, property tax, home equity interest, and income from incentive stock options are the main causes.
How to Calculate the AMT
If you’re not using tax software and think you’re subject to the AMT, you’ll need to calculate your tax liability using both the regular tax method and the AMT method. Both calculations begin at the same place, with your total income as it’s entered on your 1040 tax return. For regular tax calculations, you would subtract either the standard deduction or the total of your itemized deductions from your overall income to arrive at your taxable income. This is the amount you’d normally use to find out what percentage you owe the IRS. However, taxable income for AMT purposes doesn’t allow certain adjustments to income and certain itemized deductions, so your income could jump significantly without them. You must add them back to your income to arrive at your alternative minimum tax income. The resulting number is the AMT income figure that determines whether you have to pay the AMT because your income is over the inflation-adjusted threshold. The following expenses are not deductible when calculating the AMT, even though you can deduct them when you’re calculating your regular tax liability:
State and local taxes (an itemized deduction that includes property taxes)Mortgage interest on home equity debtAccelerated depreciation
Some types of income that are normally not taxable become taxable for purposes of calculating your AMT, as well. For example:
You must include the difference between the fair market value of incentive stock options and their strike price if the options are exercised and remain unsold at the end of the year. You must also include otherwise tax-exempt interest from private activity bonds, passive income and losses, and the net operating loss deduction.
Suppose that after this process, your AMT income were to come out to $78,000, which is more than the $75,000 exemption amount you would be entitled to if you were an unmarried taxpayer in 2022. You would be $3,000 over the threshold, so your AMT would be 26% of this amount—an additional $780 over your regular tax bill. The 26% AMT tax bracket ends, and the 28% AMT tax bracket begins, at AMT incomes of $206,100 in the 2022 tax year for all taxpayers except those who are married and file joint returns. It kicks in at $103,050 for those who are married and filing separately. The exemption amount begins phasing out by 25 cents per $1 between your AMT income and the phaseout threshold amount. The phaseout is completed, and the exemption amount is reduced to zero, when your AMT income reaches four times the exemption amount plus the phaseout threshold.
History of the Alternative Minimum Tax
The U.S. Secretary of the Treasury realized in 1969 that some taxpayers who earned well into six figures didn’t pay any tax at all. They avoided it by claiming so many tax deductions that they were effectively erasing their incomes. An “add-on” minimum tax was signed into law to prevent that, with the modern alternative minimum tax enacted in 1979 to operate alongside the add-on minimum tax. But the income threshold at which the AMT kicked in wasn’t initially indexed for inflation, and that caused some problems. The tax thresholds remained the same year after year, so more and more middle-income taxpayers found themselves subject to it as years went by, and their incomes increased. They earned incrementally more due to inflation, but the threshold remained stagnant. The AMT exemption was finally indexed for inflation when the American Taxpayer Relief Act (ATRA) went into effect in January 2013. It increases a bit every year to keep pace with taxpayers’ earnings. If you were never subject to the AMT before, it’s unlikely that a modest annual pay raise would push you over the limit from one year to the next, but some taxpayers may fall into a gray area. In 2018, the Tax Cuts and Jobs Act (TCJA) went into effect and further reduced the impact of the alternative minimum tax by increasing the exemption and phaseout figures.
