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This article was fact-checked by our editors and reviewed by Christina Taylor, MBA,senior manager of tax operations for Credit Karma Tax®. It has been updated for the 2019 tax year.
The advantages of making a lot of money may seem obvious — including the opportunity to take advantage of tax breaks that apply to certain types of income.
It’s possible those tax breaks could significantly reduce your federal income tax obligation. And that’s where the alternative minimum tax comes in. The AMT is an additional tax, imposed on top of your regular tax, that limits the benefits of certain tax breaks.
If you’re subject to the AMT, you’ll have to calculate your federal income tax twice, first using the regular method of calculating tax and then the complicated AMT method.
Here’s an overview of the AMT to help you determine whether it might apply to you, and how to calculate your tax bill if it does.
- What is the history of the AMT?
- How does the AMT work?
- How do I calculate AMT?
- Is it possible to minimize the impact of AMT?
Most taxpayers probably view tax deductions and tax credits as good things. But sometimes certain benefits available to high earners in the tax system can significantly reduce — or even eliminate — a filer’s tax obligation. The alternative minimum tax is designed to ensure that those high earners pay at least a minimum amount of federal income tax.
The AMT was first enacted in 1969 after the treasury secretary at the time reported to Congress that 155 wealthy taxpayers with incomes of more than $200,000 ($1,388,868 in today’s dollars) paid no federal income tax in 1966. But over the years the AMT’s reach expanded to impact millions of taxpayers.
Whether the AMT affects you depends on a number of factors, including filing status, the amount and type of your income and deductions for that tax year. Generally, though, the AMT affects folks with an annual income of $200,000 and greater.
Calculating the AMT is complicated. Taxpayers first calculate their “normal” adjusted gross income, then add back in certain items. Next, they subtract the applicable AMT exemption amount, multiply that by the appropriate AMT tax rate and subtract the AMT foreign tax credit to calculate a “tentative minimum” tax. If the second calculation produces a higher tax bill than your regular income tax that you calculated first, you’re required to pay the AMT.
If your income is more than a certain amount you’ll likely need to calculate your tax liability both under AMT rules and the “normal” way to determine which yields the higher tax. Although the idea is to focus on high-income taxpayers, the exemption amounts for an AMT calculation are actually not that high.
|Alternative minimum tax exemptions|
|Filing status||2019 exemption amount||2020 exemption amount|
|Single and other unmarried individuals||$71,700||$72,900|
|Married filing jointly||$111,700||$113,400|
|Married filing separately||$55,850||$56,700|
These exemption amounts begin to phase out above certain income levels. For 2019, phaseout starts at $1,020,600 for taxpayers married filing jointly, and $510,300 for everyone else (except estates and trusts). For 2020 returns, the phaseout starts at $1,036,800 for married taxpayers filing joint returns and $518,400 for all other filing statuses. Different phaseout amounts apply to estates and trusts.
But income isn’t the sole trigger. AMT applies if you report certain types of income that receive tax-favorable treatment or if you claim certain types of deductions, which are covered below.What are the 2019 federal income tax brackets?
To calculate any AMT you might owe, use IRS Form 6251.
- You’ll start by taking the amount on line 11b of your 2019 Form 1040 — your taxable income calculated using the regular method — and entering it on line 1 of Form 6251. If the amount on line 11b of your 1040 is zero, you’ll need to do some additional math as explained in the IRS Instructions for Form 6251.
- From there, add back certain adjustments that reduced your tax under the regular method of calculation. These can include taxes and investment interest reported on Schedule A, interest from specified private activity bonds, qualified small-business stock and more. Once those items are added back, the result is your alternative minimum taxable income.
- Next, you apply the exemption applicable to your filing status and calculate your AMT. If the tax calculated on Form 6251 is higher than the tax calculated on your regular return, multiply by the applicable AMT tax rate and subtract the AMT foreign tax credit.
- Report your AMT amount on line 1 of Schedule 2 attached to your Form 1040.
If that explanation makes calculating the AMT by hand sound simple, it’s not. Even the IRS recommends using tax return preparation software (including Free File) to calculate AMT.
For example, Credit Karma Tax®, a free online tax-filing service, will alert you if you need to calculate AMT, and will do the calculations for you.
The purpose of the AMT is to prevent taxpayers from gaming the system. As such, Congress made it difficult to avoid. Short of steering clear of the types of income and deductions that trigger AMT, there’s not much you can do to prevent being affected by it.
Jeremy Allen, a certified public accountant in Grants Pass, Oregon, and tax professional with TaxCE.com, says some of the “red flag” deductions that will automatically require the AMT might not be particularly familiar to the average filer. Here’s a list of “red flag” deductions.
- Accelerated depreciation
- Tax-exempt interest from private activity bonds
- Intangible drilling, circulation, research, experimental or mining costs
- Amortization of pollution-control facilities or depletion
- Income or loss from tax-shelter farm activities, passive activities, partnerships, S corporations, or activities for which you aren’t at risk
- Income from long-term contracts not figured using the percentage-of-completion method
- Investment expense
- Net operating loss deduction
- Alternative minimum tax adjustments from an estate, trust, electing large partnership or cooperative
- Section 1202 exclusion
- Stock gained from exercising an incentive stock option and not disposing of the stock in the same year
- Any general business credit claimed on Form 3800 (if line 6 or line 25 is more than zero)
- Qualified electric vehicle credit
- Alternative fuel refueling property tax
- Credit for the prior year’s alternative minimum tax
- Foreign tax credit
If you’re concerned that the AMT will affect you and you’re interested in tax strategies that can help you reduce its impact, your best bet is working with a tax professional who can help you run the numbers and consider strategies. Because there are many different types of tax professionals, and some are paid through commission while others charge fees, it’s important to choose a professional carefully.
The IRS offers a searchable directory of federal tax return preparers. You can also find tips on choosing a tax professional on the IRS website.Tax credit vs. tax deduction: Learn about the difference
The good news is that the AMT should affect fewer taxpayers going forward. This is because changes to the tax code have increased the AMT thresholds, at least through 2025. Also, the corporate AMT has been repealed.
“The Tax Cuts and Jobs Act increased the AMT exemption and the corresponding phaseout range, effectively lessening the AMT’s burden on those on the lower end of the income range,” says Joshua Hanover, an IRS Enrolled Agent and senior manager at Marks Paneth LLP in Boca Raton, Florida.
The IRS appears to agree. They used to maintain an AMT Assistant tool to help taxpayers decide whether they were required to complete Form 6251 to calculate AMT, but the IRS has announced that the AMT assistant tool will be retired after the 2018 filing season “due to declining use and the significant increase in the AMT exemption amount.”
If you are subject to the AMT, your taxes will be more complicated, but tax software can help you figure out if you have to complete Form 6251 and calculate any AMT liability. It can save you a lot of aggravation, and help you avoid a notice from the IRS that you owe more money.
Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.