By Financial Advisor Peter Egolf
This article is not tax advice. Please consult with a tax accountant to make any tax calculations and decisions.
The Alternative Minimum Tax (AMT) is a method of calculating federal income tax liability. It applies to individual taxpayers with higher income taxes and is calculated separately but in conjunction with their individual income tax returns. AMT does not apply to low- and middle-income taxpayers.
AMT aims to ensure that taxpayers pay at least a minimum amount of federal income tax. This is achieved by eliminating or reducing tax exclusions and deductions that could otherwise reduce a taxpayer’s high income.
Income is exempt from AMT below $85,700 (single filers) and $133,300 (joint filers).
Income above those exclusions is taxed at 26% up to $232,600.
Income above $232,600 is taxed at 28%.
| Single | Married, filing jointly | |
|---|---|---|
| Exemption Amount2 | $85,700 | $133,300 |
| 26% AMT Tax Rate2 | Up to $232,600 | Up to $232,600 |
| 28% AMT Tax Rate1, 2 | $609,3501 | $1,218,7001 |
For example, if you are married with a gross income of $500,000:
Gross Income = $500,000
You can take the Standard Deduction ($29,200) or the Itemized Deduction. For this example, let’s say you itemized your deduction, including $10,000 of your property taxes, for a total itemized deduction (Schedule A) of $40,000.
Itemized Deduction = $40,000
To find your regular taxable income, you would take your gross income and reduce it by your deduction, which, in this case, is itemized.
Regular Taxable Income = Gross Income - Itemized Deduction
Regular Taxable Income = $500,000 - $40,000 = $460,000
After determining your regular taxable income, you’ll add back any items that aren’t deductible under AMT (e.g., property, state, local, and sales taxes, etc.) . The result is your AMT base of $470,000.
AMT Base = Taxable Income + Add Back Deductible Items Not Allowed for AMT
AMT Base = $460,000 + $10,000 = $470,000
You then subtract your AMT exemption from the table, shown as $133,330, to arrive at your AMT Income.
AMT Income = AMT Base – Exemption
AMT Income = $470,000 - $133,300 = $336,700
Thus, our AMT Income (AMTI) is $336,670. The 26% and 28% thresholds in the table above are applied to this AMTI. Let’s calculate the taxable amounts.
$232,600 x 26% = $60,476 tax
+
$336,700 - $232,600 = $104,100 x 28% = $29,148 tax
Total Minimum Tax = $89,624
Let’s say your regular 1040 tax liability was calculated to be $110,000 compared to the tentative total minimum tax of $89,624. Thus, AMT would not apply as you are not underpaying tax.
The reverse is true if AMT tax exceeds your 1040 tax liability. For example, if your regular tax liability was calculated to be $110,000 and your tentative total minimum tax is $89,624, you would pay the AMT tax rate to account for the difference of $20,376.
The critical point of the calculations above is that AMT disallows certain deductions, exemptions, and credits. Thus, taxpayers with high incomes and a significant amount of exemptions, credits, and deductions not allowed under AMT may expose themselves to the AMT tax.
The most common examples for investors are the use of property, state, local, and sales tax deductions (limited to $10,000/year in 2024), private-activity municipal bonds, and certain types of depreciation. It’s important to remember that these deductions are not allowed under AMT.
One option is to recognize more ordinary income to minimize the effect of your existing deductions. Alternatively, deferring certain exemptions, credits, and deductions to a different tax year would accomplish a similar outcome. Your specific situation will dictate what is appropriate in the short- and long-term.
When you or your tax accountant prepare your taxes, the tax software should calculate whether or not you are required to take AMT. However, it’s helpful to understand the general mechanisms that influence AMT: your income and disallowed exemptions/deductions/credits. If you’d like to understand more than just the concept of AMT and how it applies to your specific tax situation, we recommend you speak with your tax accountant.
This article is not tax advice. Please consult with a tax accountant to make any tax calculations and decisions.
1. Incomes above the incomes listed in the 28% AMT Tax Rate for Single and Married Filing Jointly have an AMT exemption phase out at $0.25 per $1 of additional income.
2. Alternative Minimum Tax (AMT) – Tax Foundation
3. Common items that aren’t deductible for AMT include property, state, local, and sales taxes; private-activity municipal bonds, certain types of depreciation, etc.
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