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The alternative minimum tax (AMT) is an alternative tax system that ensures high-income earners pay a certain minimum in federal tax. It was designed for those taxpayers who might pay less or even no income tax under the regular income tax system—and makes sure they pay their fair share.
Simply put, the AMT is very complicated and, especially with the tax changes enacted for the 2018 tax year, affects a small percentage of Americans. But if you think your income or financial situation could trigger the AMT, you'll need to determine how much you owe using the regular system and the AMT system, and then pay the higher amount. In practice, your tax preparation software or tax preparer will generally determine whether you need to use the AMT and do the calculations for you.
What Is the Alternative Minimum Tax (AMT)?
The AMT is a parallel tax system that has different rules, tax rates and calculations than the regular tax system. High-income earners who might be affected by the AMT must run their numbers through the regular tax system with its various exemptions and deductions and then go back and do their tax calculations again, using AMT criteria. Bottom line: They pay whichever amount is higher.
Sound unfair? Some taxpayers think so, but fairness is exactly what Congress had in mind back in 1969 when it began enacting laws to ensure that high-income taxpayers paid at least a minimum amount of tax and couldn't use loopholes to skirt their obligation.
Because of how Congress wrote the laws, however—particularly, not indexing exemptions for inflation—the AMT also began to affect middle-income households years after it was enacted, which was never the intention.
That changed with the Tax Cuts and Jobs Act of 2017 (TCJA), which made significant alterations to the regular tax system and the AMT. As a result, starting with the 2018 tax year and going through 2025 (when the changes are set to expire), the AMT will generally only affect certain households with incomes over $200,000. In fact, according to the Urban-Brookings Tax Policy Center, only an estimated 0.1% of all households will have to pay the AMT for the 2018 tax year. The majority of those make over $1 million.
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How Does the AMT Work?
Under the regular tax system, you may be able to lower your taxable income by claiming deductions and adjustments that decrease your adjustable gross income and make you eligible for additional tax credits. As a result, some high-income taxpayers can greatly decrease how much they owe in federal income taxes under the regular system.
The AMT system doesn't allow the same deductions and adjustments, and it may consider different forms of income as taxable. For example, the regular tax system might exclude income from certain types of municipal bonds, while the AMT considers this income taxable.
You also can't claim the standard IRS deduction with the AMT system. The standard deduction may lower your income by $12,000 or more in 2018 under the regular system depending on your age, filing status and other factors.
How Is the AMT Calculated?
The exact AMT calculations are detailed on IRS Form 6251, and they're very complicated. You can use tax software or hire a professional tax preparer to do the work for you, but you may still want to understand how the calculations work.
The IRS offers a simplified overview of what goes into the AMT calculations:
- Determine alternative minimum taxable income (AMTI) using the AMT system to add up all your taxable income and make adjustments based on the allowed AMT adjustments and deductions.
- Subtract your AMT exemption from your AMTI.
- Multiply the result by your AMT tax rate.
- If applicable, subtract your AMT foreign tax credit.
Your AMT exemption lowers your taxable income within the AMT system, and helps keep low- to medium-income households from being affected by AMT.
For the 2018 tax year, the AMT exemptions are:
- Single and head of household: $70,300
- Married filing jointly: $109,400
- Married filing separately: $54,700
As an example, a single filer with an AMTI of $200,000 would subtract the $70,300 exemption for a taxable income under the AMT system of $129,700.
Some high-income taxpayers don't get to claim the full exemption. The exemption amount begins to decrease (eventually down to zero) for single taxpayers with an AMTI of $500,000 or more and married filing jointly taxpayers with an AMTI of $1 million or more.
After subtracting your AMT exemption, the resulting taxable income is subject to the AMT tax rates.
There are two AMT tax brackets: 26 percent for the first $191,100 of taxable AMT income and 28 percent for anything above that. Using the example above, the $129,700 taxable income gets multiplied by .26 (the 26 percent tax rate) to wind up with a tax of $33,722. This is called the tentative minimum tax.
If you qualify for the foreign income tax credit, you may have to subtract the AMT foreign tax credit (see page 10 of the instructions for Form 6251 for more details) to find your final tentative minimum tax—the amount you owe based on the AMT system.
Next, compare your final tentative minimum tax with how much you owe based on the regular tax system. You pay the greater of the two as your income tax for the year. (Note that technically, only the difference between your regular income tax amount and tentative minimum tax amount is considered your alternative minimum tax.)
Do I Need to Worry About the AMT?
The AMT is an alternative and parallel tax system that could lead some high-income households to pay more in federal income taxes than they would under the regular tax system.
You can be certain you won't have to use the AMT if your income is below your AMT exemption amount. Otherwise, you may not know whether you need to use the AMT unless you calculate your federal income tax amount under both systems.
Most taxpayers aren't affected by the AMT. If you are and you need to use the AMT system, you may need to do some extra legwork when it comes to tax time—or enlist the help of a tax software program or a tax preparer.