Posted by Karen Munoz, EA

Understanding Alternative Minimum (AMT) Tax and How it Works

Understanding Alternative Minimum (AMT) Tax and How it Works

An alternative minimum tax puts a cap on the tax percentage amount every taxpayer must pay no matter the deductions or credit they claim. As long as your income is above a specified threshold, you need to pay an alternative minimum tax to the U.S. government.

AMT employs some special rules to calculate the taxable income after deductions. The taxpayer's revenue will be added to the preferential deductions to estimate the value of alternative minimum taxable income (AMTI). To determine the final taxable amount, the AMT exemption will be subtracted.


Alternative Minimum Tax: How It Works

There would be a tax on the difference between the value of a taxpayer’s AMT exemption and AMTI. This results in the tentative minimum tax (TMT). A taxpayer with TMT higher than their regular tax liability will have to pay the regular tax for the year alongside the value for which the TMT rises above the regular tax. This means that the taxpayer pays the full tentative minimum tax.


Exemption Amount for TMT

The AMT exemption for single filers in 2020 is $72,900. Married couples filing jointly have the value at $113,400. In 2021, the figure rose to $73,600 for single filers and $114,600 for couples.

To determine if you owe AMT, a taxpayer must collect and fill Form 6251. For taxpayers, the AMT value below exemption will not have to pay AMT.

For taxpayers that have their AMTI value above a specified threshold will not get the AMTI exemption. The phase-out starts at $518,400 for single filers in 2020 and $1,036,800 for married people filing jointly. This amount will phase out at a value of $523,600 for singles in the 2021 tax year and $1,047,200 for married people filing jointly. 


The reason behind Alternative Minimum Tax 

The alternative minimum tax's main idea is to outsmart taxpayers who might want to avoid paying tax by taking excessive tax breaks. The scheme, however, was not designed to take care of tax cuts or inflations. This could trigger a bracket creep – a case where the upper-middle-income individuals that pay tax only pay this tax whereas the wealthy, who indeed should pay tax, would escape it. 


What Triggers AMT for Tax

Here are some situations that might trigger AMT tax:

  • Presence of a high Household income: the phase-out limit is $518,400 for singles and $1,036,800 for married couples filing jointly. Any household income over this value will be affected by the AMT. 

  • Meriting a Huge Capital Gain Amount: long-term gains from the sale of a home or any other investment in which you generate profit will be subjected to the same rate. Capital gains, however, can send one over the AMT exemption threshold. This could trigger AMT, which excludes you from deducting state income tax.

For people near the AMT threshold, IRS Form 6259 helps decide if they will be affected. You can also enlist the help of tax professionals to make the calculations. 

Since what influences the AMT is the income and deductions, one might be affected in one year and not the next. For people near the AMT threshold, it is a good idea to have a multi-year projection. This helps decide the tax year in which you will likely be affected and how you can manage it. An excellent way to mitigate risk, for instance, is to accelerate or delay some transaction. 

While many people do not like being slammed with AMT, it should not be a license to drop your goal. It is merely a tool everyone needs to have in mind when planning their finance. 


Estimating AMT

There is multiple tax software that can help decide if you will owe AMT. Also, filing form 6251 can help. Taxpayers will input home mortgage interest, medical expenses, and other items and deductions to help decide if their deduction is above the IRS sets' absolute limit.

One will also input information on some income types like investment interest, tax refunds, and private activity bond interest. There are specific formulas from the IRS that determines what part of the income tax filers can note on Form 6251.


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Karen Munoz, EA
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