Alternative Minimum Tax (AMT)

Understanding the Alternative Minimum Tax (AMT)

Alternative Minimum Tax (AMT) is a secondary tax system, ensuring high-income individuals, corporations, estates, and trusts pay a minimum tax, introduced to prevent tax avoidance through deductions and credits.

1. Calculation of AMT:

Taxpayers subject to the AMT must calculate their tax liability using an alternative set of rules that disallow certain deductions and exemptions allowed under the regular income tax system.

The AMT calculation begins with the taxpayer's regular taxable income and includes certain deductions like state and local taxes, medical expenses, miscellaneous itemized deductions, and specific stock option deductions.

After making adjustments, the taxpayer applies AMT rates to the resulting alternative minimum taxable income (AMTI) to determine their AMT liability.

2. Exemption and Exemption Phaseout:

The AMT provides an exemption amount, which is subtracted from the taxpayer's AMTI to determine the taxable amount subject to AMT rates.

The exemption amount is phased out for taxpayers with higher incomes, meaning that as income exceeds certain thresholds, the exemption amount is reduced or eliminated entirely.

3. AMT Rates:

The AMT rates are typically lower than the regular income tax rates, but the broader tax base can result in a higher overall tax liability for some taxpayers.

There are two AMT tax rates: 26% and 28%. 

Taxpayers calculate their tentative minimum tax by applying these rates to their AMTI and then compare it to their regular tax liability calculated under the standard income tax rules.

4. Tax Credits:

Taxpayers subject to AMT may be eligible for certain tax credits that can offset their AMT liability. 

These credits include the foreign tax credit, the credit for child and dependent care expenses, and the credit for the elderly or disabled.

5. Filing Requirements:

Taxpayers must determine whether they are subject to the AMT by completing Form 6251 (in the United States) and including it with their annual income tax return.

If the taxpayer's AMT liability exceeds their regular tax liability, they must pay the higher AMT amount.

6. Tax Planning:

Taxpayers subject to AMT may engage in tax planning strategies to minimize their AMT liability, such as accelerating or deferring certain deductions or managing their investment portfolio to minimize tax preferences.