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Alternative Minimum Tax 2020-2021: What is it & Who Has to Pay it?

Alternative Minimum Tax 2020-2021: What is it & Who Has to Pay it?

What is the alternative minimum tax (AMT)?

Alternative Minimum Tax (or AMTs) is a different but parallel method of calculating the taxpayer's account. It applies to people with incomes above a certain level and aims to fill the gaps that allow them to reduce or eliminate tax payments. It is adjusted annually for inflation.

How the AMT works

The AMT has its own set of taxes (26% and 28%) and requires a separate calculation from the normal federal income tax. Basically, this is the difference between the normal tax invoice, based on normal tax rates, and the AMT invoice, determined by completing IRS Form 6251: Alternative Minimum Tax - Individuals. When there is a difference, you may have to pay the AMT in addition to your usual tax.

AMT increases the value of taxable income of high-income earners. Add non-taxable items to standard tax rates and reject or reduce many common tax cuts used by individual taxpayers to reduce IRS bills.

AMT exemption values for the period 2020-2021

To be required to pay AMT, you must have earned more than the minimum level shown in the table below.

  • Married filing jointly up to $114,600 for 2021 and $113,400 for 2020

  • Married filing separately up to $57,300 2021 and $56,700 for 2020

  • Single or HoH up to $73,600 for 2021 and $72,900

Who must pay the AMT?

Anyone who surpasses the income levels in the table above may be subject to AMT. However, reaching these levels does not automatically trigger AMT. You can manually fill out IRS Form 6251, use tax software, or hire a tax preparer to help you ascertain if you owe the AMT and, if so, calculate the amount owed.

The Internal Revenue has set income levels to determine the AMT's commission. If your income is below the level shown in the table below, you will be taxed at 26%. If your income exceeds the indicated level, an income tax greater than 28% applies.

AMT tax rate income level

  • Single or household $199,900 for 2021 and $197,900 for 2020

  • Married filing separately $99,950 for 2021 and $98,950 for 2020

  • Married filing jointly $199,900 for 2021 and $197,900 for 2020

This means that for an individual who earned more than $73,600 in 2021 but not up to $199,900, the AMT rate is 26%. If that person earns more than $199,900, the AMT rate drops to 28%.

The AMT exemption, the amount taxpayers can forfeit before activating the AMT, will eventually be reduced to 25 cents on the dollar earned once income reaches the thresholds shown below. This implies that you can no longer exempt AMT income if your income exceeds these levels.

AMT Phase out threshold 

  • Single or head of household $523,600 for 2021 and $518,400 for 2020

  • Married filing separately $523,600 for 2021 and $518,400 for 2020

  • Married filing jointly $1,047,200 for 2021 and $1,036,800 for 2020

How the AMT may affect your eligibility for tax exemptions

With AMT, many of the items that you can deduct from a standard tax no longer apply. According to AMT:

  • Home equity loans interest is limited. It can only be deducted if the money is used exclusively to pay for the renovation of the home.

  • Itemized multiple deductions are not allowed for AMT, which must exceed 2% of gross income adjusted under the ordinary tax regime.

  • Medical expenses must exceed 10% of gross income to be deducted.

  • Property taxes are not allowed as a deduction under the AMT.

  • Some tax credits that reduce your normal tax do not reduce what you owe under the AMT. After adding these prohibited items and running the numbers, you may be subject to a higher IRS bill if your taxable income exceeds that of the annual AMT exemption amount for your filing status.

  • State and local taxes cannot be deducted.

  • You do not receive the standard deduction or the personal exemption.

Additional tax incentives not authorized by the AMT that mainly affect high-income earners are:

  • Accelerated depletion and depreciation of personal or leased property.

  • Incentive stock options.

  • Intangible drilling costs.

  • Tax-exempt interest on certain securities of private companies.

Determining your financial responsibility for AMT can be difficult. Tax software or a tax professional may be the best way to determine what you owe. After completing this year's tax return, seek advice from an accountant or tax professional on ways to potentially reduce your tax liability in the future.



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