An alternative minimum tax (AMT) places a floor on the percentage of taxes that a filer must pay to the government, no matter how many deductions or credits the filer may claim.
The United States currently has an alternative minimum tax for taxpayers who earn above certain income thresholds.
The AMT recalculates income tax by adding certain tax preference items back into adjusted gross income. It uses a separate set of rules to calculate taxable income after allowed deductions. Preferential deductions are added back into the taxpayer’s income to calculate their alternative minimum taxable income (AMTI), and then the AMT exemption is subtracted to determine the final taxable figure.
Key Takeaways
- The AMT ensures that certain taxpayers pay their fair share or at least a minimum amount of tax.
- It doesn’t kick in until income reaches beyond a certain exemption level.
- For 2023, the exemption is $81,300 for single filers and $126,500 for couples filing jointly.
- For 2024, the exemption is $85,700 for single filers and $133,300 for couples filing jointly.
- In 2012, Congress indexed the exemption amount to inflation to prevent middle-income taxpayers from owing AMT due to bracket creep.
How the Alternative Minimum Tax Works
The difference between a taxpayer’s alternative minimum taxable income and their AMT exemption is taxed using the relevant rate schedule. This yields the tentative minimum tax (TMT).
If the tentative minimum tax is higher than the taxpayer’s regular tax liability for the year, then they pay the regular tax and the amount by which the tentative minimum tax exceeds the regular tax. In other words, the taxpayer pays the full tentative minimum tax.
There are two alternative minimum tax rates, 26% and 28%. For 2023, the 28% rate applies to the excess alternative minimum taxable income of $220,700 or more for all taxpayers ($110,350 for married couples filing separate returns). For 2024, the 28% rate applies to the excess alternative minimum taxable income of $232,600 or more for all taxpayers ($116,300 for married couples filing separate returns). The 26% rate applies to incomes up to those levels.
A taxpayer who has a high income and uses large tax breaks may owe a smaller percentage under the standard rules. If so, the taxpayer is obliged to recalculate the taxes owed under the alternative minimum tax system, which eliminates some of those tax breaks.
The taxpayer will owe whichever amount is higher.
AMT Exemption Amounts
For tax year 2023, the figures are $81,300 for single filers and $126,500 for married joint filers. For tax year 2024, the AMT exemption for single filers is $85,700. For married joint filers, the figure is $133,300.
Taxpayers have to complete Form 6251 to see whether they might owe AMT. First, they subtract the exemption amount from their income. If their AMT is less than the exemption, they do not have to pay AMT.
It’s important to note, though, that taxpayers with AMTI over a certain threshold do not qualify for the AMT exemption. For tax year 2023, the phase-out begins at $578,150 for single filers and $1,156,300. For tax year 2024, the phase-out begins at $609,350 for single filers and $1,218,700 for couples filing jointly.
Purpose of AMT
AMT is designed to prevent taxpayers from escaping their fair share of tax liability through tax breaks. However, in the past, the structure was not indexed to inflation or tax cuts. This can cause bracket creep, a condition in which middle-income taxpayers could be subject to this tax instead of just the wealthy taxpayers for whom AMT was invented. In 2012, however, Congress passed a law indexing the AMT exemption amount to inflation.
Calculating AMT
To determine if they owe AMT, individuals can use tax software that automatically does the calculation, or they can fill out IRS Form 6251. This form takes medical expenses, home mortgage interest, and several other miscellaneous deductions into account to help tax filers determine if their deductions are beyond an overall limit set by the IRS.
The form also requests information on certain types of income such as tax refunds, investment interest, and interest from private activity bonds, as well as numbers corresponding with capital gains or losses related to the disposition of property.
The IRS has specific formulas in place to determine which portion of this income and deductions the tax filers need to note on Form 6251. It uses another set of formulas to determine how these numbers lead to AMTI.
What Is the AMT?
It’s a tax that applies to high-income individuals who otherwise (under the standard U.S. tax system) might pay little or even no taxes. Essentially, it involves an alternate tax system that is used in addition to the standard system. Each calculates tax owed. The taxpayer pays whichever is greater.
What Is the AMT Exemption for Tax Years 2022 and 2023?
For tax year 2023, the AMT exemption for individuals is $81,300 and $126,500 for married couples filing jointly. For tax year 2024, the figures are $85,700 and $133,300, respectively.
Does the AMT Account for Inflation?
Yes, but it only did so periodically before the passage of the American Taxpayer Relief Act of 2012. With that legislation, the AMT was to be permanently indexed to inflation. The Tax Cuts and Jobs Act of 2017 also increased the AMT exemption and the income level at which the exemption began to phase out. This reduced the number of people affected by the AMT. These changes expire after 2025.
The Bottom Line
The Alternative Minimum Tax is an additional or parallel tax system in the U.S. that is designed to ensure that high-income individuals pay their fair share of taxes. Prior to the AMT, certain taxpayers paid little in the way of taxes, due to preferential treatment of certain income and expenses, or tax breaks.
Related Terms: tax preference items, tax liability, AMT exemption, tentative minimum tax.
References
- Internal Revenue Service. “Topic No. 556, Alternative Minimum Tax”.
- Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2023”.
- Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2024”.
- U.S. Congress. “H.R.8 - American Taxpayer Relief Act of 2012”.
- Internal Revenue Service. “Rev. Proc. 2022-38”. Page 12.
- Internal Revenue Service. “Rev. Proc. 2023-34”. Page 11.
- Tax Policy Center. “What Is the AMT?”
- Congressional Research Service. “The Alternative Minimum Tax for Individuals: In Brief”. Page 1.
- U.S. Government of Accountability Office. “Alternative Minimum Tax: An Overview of Its Rationale and Impact on Individual Taxpayers”. Pages 2-3.
- Internal Revenue Service. “Form 6251, Alternative Minimum Tax—Individuals”.
- Internal Revenue Service. “Schedule A (Form 1040), Itemized Deductions”.
- Tax Policy Center. “How Did the TCJA Change the AMT?”
