Alternative Minimum Tax (AMT): Definition, Who Pays & More

Alternative Minimum Tax (AMT): Definition, Who Pays & More
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You may be subject to the alternative minimum tax if you earned more than ​$73,600​ in 2021 as a single taxpayer, or ​$114,600​ as a married couple filing a joint return. The AMT requires that high earners must calculate their tax bill twice, once without certain tax credits and deductions, then again on the Form 1040 tax return according to the usual tax rules. They must pay the higher of the two resulting taxes.

What Is Alternative Minimum Tax?

The Tax Reform Act of 1969 introduced the alternative minimum tax. Lawmakers were reacting to the treasury secretary’s announcement that 155 taxpayers with incomes of more than ​$200,000​ had almost entirely escaped taxation in 1966. These wealthier taxpayers were able to spend more money on tax-deductible costs and expenses, thus whittling away at their taxable incomes to a point where they owed the IRS nothing.

The AMT obligated such taxpayers to add back in these deductions, effectively disallowing them for incomes over certain thresholds, referred to as exemptions. The exemptions represent the first dollars of your income that are not subject to the alternative minimum tax.

Unfortunately, the number of affected taxpayers grew over time because these exemptions weren't initially indexed for inflation. Taxpayers were earning slightly more from year to year due to natural fluctuations in the economy, but the exemption thresholds were carved in stone and they remained unchanged. The situation reached a point where more and more middle-income taxpayers were finding themselves caught up in an AMT net intended to capture the wealthy.

That changed with the American Taxpayer Relief Act in 2012, which allowed the exemption amounts to be tweaked annually to keep pace with the economy.

How the AMT Is Calculated

The AMT is calculated on Form 6251, which must be submitted to the IRS with your tax return. The form walks you through the calculations.

It begins with the taxable income you arrived at on line 15 of your Form 1040 tax return, then it adds back certain sources of income and deductions. You can then subtract your exemption amount from that total. The result is the amount of income to which you must apply special AMT tax rates.

These rates are a flat ​26 percent​ or ​28 percent​ as of 2022, depending on the amount of your AMT income, what's left on Form 6251 after you subtract your exemption. The 26 percent rate applies to AMT income of up to ​$199,900​ as of tax year ​2021​ (the return you'll file in 2022), unless you're married and filing a separate return. It drops to ​$99,950​ in this case. Incomes over these amounts are taxed at the 28 percent AMT rate.

These income thresholds increase to ​$206,100​ in tax year ​2022​, and to ​$103,050​ for taxpayers filing separate married returns.

Compare the amount of AMT tax you'd owe to the tax due on your Form 1040 tax return. You must pay whichever is higher.

Read more​: Married Filing Separately: When You Should File Your Tax Return Separately

The AMT Exemption Amounts

The ​2020AMT exemptions were set at ​$72,900​ for single taxpayers or ​$113,400​ for those who were married and filing jointly. They increased to ​$73,600​ and ​$114,600​ in the ​2021​ tax year when they were adjusted for inflation. They increase again to ​$75,900​ and ​$118,100​ in the 2022 tax year.

But these amounts begin to phase out if you earn a great deal more. They decrease until they're eventually eliminated entirely for those with very high incomes. The exemptions begin to phase out at ​25 cents per dollar​ of AMT-calculated incomes of ​$523,600​ for single filers in ​2021​ and ​$1,047,200​ for married filers of joint returns. These limits increase to ​$539,900​ and ​$1,079,800​ in 2022.

The end result is that you'll be limited to subtracting less than the full exemption amount from your AMT income if you earn this much, and you'll pay the 28 percent tax rate on the balance.

The TCJA and the Alternative Minimum Tax

The Tax Cuts and Jobs Act increased the exemptions when the law went into effect in 2018, while also pulling back on some of the credits and deductions that the AMT eliminates. Unfortunately, the TCJA expires at the end of ​2025​ unless Congress takes steps to renew the law in its entirety or at least the AMT provisions.

Alternative Qualifications for AMT

Your AMT-calculated income also includes sources of income that can increase your taxable earnings. These include:

  • Exercised stock options that weren’t sold
  • Bond interest
  • Foreign tax credits
  • Passive income
  • Deductions for business or personal losses

You Might Get a Tax Credit

Now here's a bit of good news if you were subject to the AMT in previous years, but your income dropped so you dodged the bullet in the current tax year. You might qualify for a special tax credit this year that you can use against any tax you owe when you file your 2021 return in 2022, or in future years.

You can complete and submit Form 8801, Credit for Prior Year Minimum Tax - Individuals, Estates, and Trusts with your tax return to claim a special minimum tax credit. The form will also help you calculate whether you're eligible.

Consider talking with a tax professional for guidance if your income is such that you might have to deal with the AMT, or if you were subject to it in the past.