If you earn more than $200,000 a year, you may be subject to something called an alternative minimum tax. The AMT requires high-income earners to calculate their tax bill twice, once without tax credits and deductions, and pay the higher of the two figures. The Tax Cuts and Jobs Act temporarily reduced the number of Americans who had to pay AMT, but if you earn $200,000 or more, it’s important to check.
What Is Alternative Minimum Tax?
The Tax Reform Act of 1969 introduced the alternative minimum tax to taxpayers in an effort to ensure the wealthiest Americans paid taxes. At the time, lawmakers were reacting to the treasury secretary’s announcement that 155 taxpayers with incomes of more than $200,000 paid nothing in taxes in 1966. Through the 1990s, the AMT affected fewer than one million taxpayers.
Unfortunately, over time, the number of affected taxpayers grew. While the regular income tax is often adjusted for inflation, the AMT is not, which is why the threshold for paying it isn’t all that different from the original threshold in 1969. But the Tax Cuts and Jobs Act reduced the amount so that fewer taxpayers are affected through 2025, when the TCJA expires.
How AMT Is Calculated
The AMT is calculated on Form 6251. In Part 1, you’ll probably notice that the worksheet walks you through making this calculation. You’ll input the amount on Line 11b of Form 1040, then enter earnings like investment interest, your business operating loss deduction and depreciation on assets.
Once you have the total, you’ll subtract it from the figure in Part 2 to determine your exemption. The exemption will be multiplied by the AMT tax rates, which are 26 percent or 28 percent depending on your exemption amount. If your exemption is $100,000, for instance, you would multiply that by 26 percent to get $26,000.
With that calculation complete, you’ll compare it to your income tax as calculated under regular rules. Under AMT, you must pay the higher amount of the two.
AMT Exemption Amounts
Since you subtract the exemption amount from your taxable income to arrive at the federal income tax you’ll pay, it can help to know what the current exemption amounts are. These are subject to change from year to year and will increase in 2026 once the TCJA expires.
In 2020, the AMT exemption is $72,900 if you’re single or $113,400 if you’re married filing jointly. The exemption begins to phase out if your income is $518,400 if you’re single or $1.36 million if you’re married filing jointly. For some individuals under the age of 24, at one time you’d use a special formula, but Public Law 116-94, Div O, Section 501 suspended that, so now you’ll use the same formula as everyone else.
TCJA and Alternative Minimum Tax
In 2017, the AMT affected an estimated 5.1 million tax filers. With the Tax Cuts and Jobs Act, that number fell to an estimated 200,000 filers in 2019. The TCJA didn’t eliminate the AMT, but it did increase the exemption while also pulling back on some of the credits the AMT eliminates.
TCJA also either eliminated or scaled back the restrictions on many of the deductions AMT-affected taxpayers have experienced. The most important of these is the state and local tax deduction, which was hit pretty hard by AMT. Most of the millions of taxpayers who saw their SALT deduction retracted before TCJA have been able to claim it after TCJA.
Unfortunately, TCJA is only a temporary tax relief program. In 2026, it will expire, leaving taxpayers with a taxable income of $200,000 or more to go back to calculating whether they need to pay AMT or regular income tax. Under TCJA, the Tax Policy Center estimates that AMT only affects those earning $1 million each year.
Alternative Qualifications for AMT
Your salary isn’t the only factor the IRS uses in determining whether you might need to pay AMT. Your income is determined using your business or personal earnings, as well as other sources of income that boost your taxable earnings. This includes the following:
- Exercised stock options that weren’t sold
- Bond interest
- Foreign tax credits
- Passive income
- Deductions for business or personal losses
You could also trigger a need to pay alternative income tax if your deductions for the following items are high:
- State and local taxes
- Mortgage interest for second home loans that weren’t used on home improvements
- Miscellaneous itemized deductions
- Medical expenses
The Adjusted AMT Phaseout
Although the exemption amount affects whether you have to consider calculating AMT at all, there’s an upper limit, as well. The TCJA also temporarily helps out in that area. Before TCJA, the phaseout on the exemption was $120,700, but that increased to $500,000 for individuals. For married couples filing jointly, the exemption went from $160,900 to $1 million.
By lifting the phaseout threshold, the TCJA allows high-income taxpayers to keep their full exemption longer. A higher exemption means more of a high-income taxpayer’s earnings are excluded from being taxed. Temporarily, at least, it dramatically reduces the number of people who end up paying the alternative tax, which lets them enjoy more deductions.
Reducing Your Tax Liability
If you think your salary will put you in a situation where you’ll have to pay the alternative tax, you can reduce your risks through some proactive measures. You’ll be more likely to have to pay regular tax if you can decrease your taxable income during the tax year. One of the best ways to do this is to set some money aside for the future.
One of the best ways to offset your tax burden, whether you’re paying regular tax or alternative tax, is to fund your IRA. You can contribute up to $6,000 to these retirement savings plans, or $7,000 if you’re age 50 or older. A health savings account is another option, with a limit of $3,600 in 2021, or $7,200 a year for family coverage.
Read More: A List of Items That Can Be Claimed on Income Taxes
Carryover From Year to Year
If you have taxable investments, look to see if you have any losses. You may also decide to plan ahead and not take large itemized deductions in a year in which you’re at risk of having to pay AMT. It’s also important to run the calculation every year, even if you’ve had to pay AMT every year previously. As the changes brought by the TCJA have shown, your tax standing can change from one year to the next.
In some instances, you may be able to earn tax credits for previous years in which you paid the AMT. If your income is lower this year than previous years, or you’re otherwise ineligible for AMT this year, you could take a special minimum tax credit against this year’s tax filing. To calculate whether you’re eligible for the credit, use Form 8801.
The tax system can certainly be complicated, but the IRS has worksheets that will walk you through the process. For high earners, it’s often wise to rely on the expertise of professionals to find the perfect balance between earning, investing and saving money so that you’re reducing your taxable income as much as possible.
- CNBC: After the Tax Law Changes, Millions of Households Avoided the AMT Hit Last Year
- Tax Policy Center: What Is the AMT?
- IRS.gov: Form 6251
- IRS.gov: 2019 Instructions for Form 6251
- Center for American Progress: Repealing the Salt Cap Should Not Be a Top Priority in Reforming 2017 Tax Law
- Tax Policy Center: The Tax Cuts and Jobs Act and the Zombie AMT
- M1Finance: What Is the Alternative Minimum Tax or AMT?
- IRS.gov: IRA FAQs - Contributions
- Kiplinger: HSA Limits and Minimums
- IRS.gov: Form 8801
- Tax Policy Center. "Key Elements of the U.S. Tax System." Accessed July 10, 2020.
- IRS. "Topic No. 556 Alternative Minimum Tax." Accessed July 7, 2020.
- U.S. Congress. "H.R.8 - American Taxpayer Relief Act of 2012." Accessed July 7, 2020.
- U.S. Congress. "Individual Tax Reform," Pages 59–61. Accessed July 7, 2020.
- Tax Foundation.org. "2019 Tax Brackets." Accessed July 10, 2020.
- IRS. "Form 6251, Alternative Minimum Tax—Individuals." Page 2. Accessed July 7, 2020.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.