What the Alternative Minimum Tax (AMT) is
– Definition: The AMT is a parallel federal tax system designed to make sure taxpayers with relatively large incomes and many tax preferences (deductions, exemptions, or other adjustments) pay at least a minimum amount of federal income tax. It recalculates income by adding back certain tax breaks, applies a separate exemption and tax rates, then compares the resulting AMT to your regular tax; you pay whichever is higher.
How the AMT works — step by step
1. Start with your regular taxable income reported on your return.
2. Make AMT adjustments and preference add‑backs to reach Alternative Minimum Taxable Income (AMTI). (Those add‑backs differ from person to person; Form 6251 lists typical items.)
3. Subtract the AMT exemption amount for your filing status (the exemption phases out for higher AMTI).
4. Apply the AMT rate schedule to the remaining AMT base:
– Two rates apply: 26% and 28%. The higher 28% rate applies to AMT income above a statutory threshold (for 2025 that threshold is $239,100 for most filers; half that for married filing separately).
5. The result is your tentative AMT. Compare it to your regular tax liability. If tentative AMT is larger, you owe the difference as additional tax.
6. If AMT applies, you must file Form 6251 with your return.
Key numeric parameters (per the IRS figures cited)
– AMT exemption amounts (2025): single $88,100; married filing jointly $137,000.
– Phaseout thresholds begin (2025): single $626,350; married filing jointly $1,252,700. Exemptions shrink by $0.25 for every $1 of AMTI above the threshold.
– AMT rates: 26% and 28%. The 28% rate applies to AMT income above $239,100 (2025); for married filing separately, that breakpoint is $119,550.
How the exemption phaseout works (formula)
– Reduced exemption
Reduced exemption = exemption − 0.25 × (AMTI − phaseout threshold), but not less than zero.
Worked numeric example — exemption phaseout
– Facts (single filer, tax year 2025): AMTI = $700,000; exemption = $88,100; phaseout threshold = $626,350.
– Step 1: Compute excess AMTI above threshold = 700,000 − 626,350 = 73,650.
– Step 2: Compute reduction = 0.25 × 73,650 = 18,412.50.
– Step 3: Reduced exemption = 88,100 − 18,412.50 = 69,687.50 (cannot go below zero).
Next, compute tentative AMT and compare to regular tax
– AMT taxable income = AMTI − reduced exemption = 700,000 − 69,687.50 = 630,312.50.
– Apply AMT rates (2025 break at $239,100 for single):
– 26% on first $239,100 = 0.26 × 239,100 = $62,166.00
– 28% on remainder = 0.28 × (630,312.50 − 239,100) = 0.28 × 391,212.50 = $109,539.50
– Tentative AMT = 62,166.00 + 109,539.50 = $171,705.50.
– If regular tax liability (from the ordinary tax computation) = $140,000, AMT owed = tentative AMT − regular tax = $31,705.50. If regular tax ≥ tentative AMT, no AMT is due.
Short example where AMT does not apply
– Single filer, AMTI = $200,000; exemption = $88,100; no phaseout because AMTI < 626,350.
– AMT taxable = 200,000 − 88,100 = 111,900. Entire amount taxed at 26% = 0.26 × 111,900 = $29,094 tentative AMT. If regular tax is $30,000, no AMT is due because tentative AMT 0, you pay AMT instead of regular tax.
Worked numeric example (illustrative assumptions)
Assumptions (for illustration only; real tax parameters change each year):
– Regular taxable income = $200,000
– AMT adjustments and preferences (ISO bargain element + disallowed state taxes etc.) = $150,000
– Assumed AMT exemption = $80,000
– AMT rate = 26% for the taxable portion in the lower bracket (we’ll apply one rate for simplicity)
Steps:
1. AMTI = $200,000 + $150,000 = $350,000
2. AMT base = $350,000 − $80,000 = $270,000
3. TMT = 26% × $270,000 = $70,200
4. Suppose regular tax (ordinary calculation) = $55,000
5. AMT owed = max(0, $70,200 − $55,000) = $15,200
Interpretation: In this example, you would pay $15,200 more under AMT rules than under regular tax. The numbers are illustrative; use current-year exemption amounts and the two‑tier AMT rates in real calculations.
Minimum tax credit (AMT credit) basics
– If you paid AMT in a prior year solely because of timing differences (not permanent preferences), you may be eligible for a minimum tax credit (sometimes called a minimum tax credit or AMT credit) that can reduce your regular tax in later years.
– The credit is calculated on IRS Form 8801 and is carried forward until used or until it expires under tax law. Permanent AMT preferences (items never allowed under regular tax) generally do not generate a usable credit.
– Practical rule: keep documentation showing which AMT items were timing differences (e.g., ISO exercises) versus permanent preferences, because that affects future credit eligibility.
Practical checklist before you act
– Project both regular tax and tentative AMT mid‑year and at year‑end.