What Is the Alternative Minimum Tax?

Understanding the alternative minimum tax

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A few weeks ago I sat myself down and prepared five years of tax returns for a client by hand. In the process, I learned something. If a person does not itemize their deductions, they can still be hit with the Alternative Minimum Tax (AMT). The AMT is an alternate method of calculating a person's tax liability. Technically, an individual is responsible for paying the higher of their regular tax or minimum tax.

A lot of us get caught up in the details of what triggers the AMT. Those details are certainly important. But the most important cause of AMT is also the easiest to overlook: income. Or to be more precise, adjusted gross income.

If a person does not itemize their deductions, then the person's income for the purpose of calculating the AMT is their adjusted gross income minus the AMT exemption amount. That was the insight I learned when I prepared those tax returns by hand. I would not have seen the connection if I had been using my software.

Constructing the Tax Base

Both the regular tax and the AMT calculations start from the same place: page one of the Form 1040. On page one we add up a person's total income, and then we subtract out various adjustments to income, resulting in adjusted gross income. From this point, the AMT and the regular tax calculations part ways.

For the regular tax, we take adjusted gross income (AGI) and subtract either the standard deduction or itemized deductions, and then subtract personal exemptions.

The result is a person's taxable income for the regular tax. This taxable income figure is the amount we use to look up the tax liability figures in the tax tables.

The alternative minimum tax constructs taxable income differently. Taxable income for AMT purposes does not allow the standard deduction, or personal exemptions, or certain types of itemized deductions.

Some income which is not subject to the regular tax is added for AMT purposes. To streamline the calculations, Form 6251, which is used to calculate the alternative minimum tax, shows only the differences or adjustments made to arrive alternative minimum taxable income (AMTI).

AMT Adjustments

The following types of income are taxable when calculating the AMT, even though they are non-taxable when calculating the regular tax:

  • 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, and
  • Tax-exempt interest from private activity bonds.

The following items are not deductible when calculating the AMT, even though they are deductible when calculating the regular tax.

The following items are recalculated for AMT purposes:

This list is not comprehensive. It reflects the typical adjustments I see. If any of these deductions are significant, this can trigger an AMT liability.

The Effect of AMT Adjustments

Typically, the alternative minimum tax eliminates most or exactly all of the regular tax savings from the above-mentioned deductions.

AMT Exemption Amounts and Phaseouts for 2016

Filing status

Exemption Amount

The exemption amount is phased out starting at AMTI of

The exemption amount is fully phased out by AMTI of

Head of Household53,900119,700335,300
Married Filing Separately41,90079,850247,450
Married Filing Jointly83,800159,700494,900
Qualifying Widow/Widower83,800159,700494,900
Source: Revenue Procedure 2015-53, pdf, IRS.gov.


AMT Exemption Amounts and Phaseouts for 2015

Filing status

Exemption Amount

The exemption amount is phased out starting at AMTI of

The exemption amount is fully phased out by AMTI of

Head of Household53,600119,200333,600
Married Filing Separately41,70079,450246,250
Married Filing Jointly83,400158,900492,500
Qualifying Widow/Widower83,400158,900492,500
Source: Revenue Procedure 2014-61, pdf, IRS.gov.


Phaseout of the AMT Exemption Amount

The exemption amount functions kind of like a standard deduction for the Alternative Minimum Tax. In other words, in lieu of all the disallowed deductions and other adjustments, taxpayers reduce their alternative minimum taxable income by the exemption amount. The alternative minimum tax is calculated on the remainder left over after the exemption amount has been subtracted from AMT income.

The exemption amount is variable: it gradually shrinks as income increases. The exemption amount is reduced or phased out by one-fourth of the difference between a person's alternative minimum taxable income and the phaseout threshold amount. Accordingly, the phaseout is completed (meaning the exemption amount is reduced to zero) once AMT income reaches four-times the exemption amount plus the phaseout threshold.

AMT Tax Rates

After constructing the tax base of alternative minimum taxable income, calculating and subtracting the exemption amount, what's left over is a remainder amount. This remainder is multiplied against the AMT tax rates. There are just two tax rates: 26 percent and 28 percent.

For 2016, the threshold where the 26% AMT tax bracket ends and the 28% AMT tax bracket begins is:

  • $93,150 : for married filing separately, and
  • $186,300 : for any other filing status.

For 2015, the threshold where the 26% AMT tax bracket ends and the 28% AMT tax bracket begins is:

  • $92,700 : for married filing separately, and
  • $185,400 : for any other filing status.

Quick Check to See if You are Subject to AMT

The Internal Revenue Service has an online calculator to help you figure out if you are subject to the alternative minimum tax. It's called the AMT Assistant for Individuals.

There's also a fairly quick worksheet in the Instructions for Form 1040. You can use this worksheet to determine if you'll need to fill out the longer Form 6251 to compute your alternative minimum tax.

Most software will compute the alternative minimum tax automatically. Individuals should review the actual tax form to understand which income or deductions are causing the AMT liability. For many taxpayers, deductions for state income tax, property tax and home equity interest and income from incentive stock options are the main causes.

AMT Tax Planning

Devising tax strategies around the alternative minimum tax can be tricky, since the AMT often adjusts for various deductions and credits. In general, tax professionals recommend the following planning tips.

Seek reimbursements from your employer for business expenses incurred as an employee. These expenses are part of the miscellaneous itemized deductions, which are added back to your income for AMT purposes. Having your employer reimburse you for those expenses, by contrast, is a tax-free event to you, and prevents a higher AMT adjustment.

Review your state tax withholding so that you pay in enough so you don't owe but not enough that you substantially overpay. This will keep your state tax deduction to as low as possible, thereby keeping your AMT adjustments as small as possible.

Pay your property taxes when due instead of prepaying your next installment by the end of the year. Again, this will keep your deduction for state and local taxes as low as possible.

Sell exercised incentive stock options in the same year you exercise them. When you exercise & sell incentive stock options in the same year, you'll be subject to the regular tax on the income but not the AMT. However, if you exercise but not sell, the value of the exercised options because income for AMT purposes.

For a comprehensive discussion of all the AMT adjustments and tax planning strategies, see chapter 23 of J.K. Lasser's Your Income Tax.

Another top-notch resource is chapter 14 of the PriceWaterhouseCoopers Guide to Tax and Financial Planning which provides a checklist of fourteen strategies for minimizing the AMT.

On the IRS.gov Web site:

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