What is the AMT?
The Alternative Minimum Tax (AMT) is a parallel tax system designed to ensure that high-income individuals, estates, and trusts pay a minimum amount of income tax, even if they have significant deductions and credits. Essentially, it limits the extent to which certain tax benefits can reduce your overall tax liability.
Here's the deal: you only owe AMT if your tentative minimum tax is higher than your regular tax.
How Does it Work?
The AMT calculation involves a few key steps:
Calculate Alternative Minimum Taxable Income (AMTI): You start with your regular taxable income but adjust it by adding back certain deductions and exemptions that are allowed under the regular tax system but not under the AMT. This includes items like state and local taxes, certain depreciation deductions, and incentive stock options.
Subtract the AMT Exemption Amount: You can subtract an exemption amount, which varies based on your filing status. These exemption amounts are adjusted annually for inflation.
Apply AMT Tax Rates: Multiply the result by the AMT tax rates. The law sets the AMT exemption amounts and AMT tax rates. Taxpayers can use the special capital gain rates in effect for the regular tax if they're lower than the AMT tax rates that would otherwise apply.
Subtract the AMT Foreign Tax Credit: If applicable, you can subtract the AMT foreign tax credit.
The AMT is the difference between your tentative minimum tax and your regular tax liability. You pay the higher of the two.
Am I Affected by the AMT?
To determine whether you're subject to the AMT, refer to the instructions for Form 1040. Alternative Minimum Tax (AMT) line instructions in the Instructions for Form 1040 (and Form 1040-SR). The instructions will guide you through a worksheet to help you figure out if you need to complete Form 6251, Alternative Minimum Tax – Individuals. If subject to the AMT, you may be required to complete and attach Form 6251, Alternative Minimum Tax – Individuals. See the Instructions for Form 6251 PDF.
Minimum Tax Credit
Even if you aren't subject to the AMT this year, you could be eligible for a minimum tax credit if you paid AMT in prior years. If you're not liable for AMT this year, but you paid AMT in one or more previous years, you may be eligible to take a special minimum tax credit against your regular tax this year. If eligible, you should complete and attach Form 8801, Credit for Prior Year Minimum Tax - Individuals, Estates, and Trusts to claim the minimum tax credit. Claim this credit by filing Form 8801, Credit for Prior Year Minimum Tax - Individuals, Estates, and Trusts. This credit can reduce your regular tax liability in a year when you're not subject to the AMT.