What is the alternative minimum tax (AMT)?
The alternative minimum tax, or AMT, is a different, yet parallel, method to calculate a taxpayer’s bill. It applies to people whose income exceeds a certain level and is intended to close the loopholes that allow them to reduce or eliminate their tax payments. It’s adjusted each year for inflation.
How the AMT works
The AMT has its own set of rates (26 percent and 28 percent) and requires a separate calculation from regular federal income tax. Basically, it’s the difference between your regular tax bill, based on ordinary income tax rates, and your AMT bill, determined by completing IRS Form 6251: Alternative Minimum Tax — Individuals. When there’s a difference, you may have to pay the AMT amount in addition to your regular tax.
The AMT increases the amount of income that is taxed for high earners. It adds items that are not taxed on the standard tax rates and rejects or reduces many common tax breaks used by individual taxpayers to lower their IRS bills.
AMT exemption amounts for 2020-2021
To be required to pay the AMT, you must have earned more than the minimum level in the chart below.
|Filing status||2o21 AMT exemption||2o20 AMT exemption|
|Single or head of household||Up to $73,600||Up to $72,900|
|Married, filing separately||Up to $57,300||Up to $56,700|
|Married, filing jointly||Up to $114,600||Up to $113,400|
Who has to pay the AMT?
Anyone who exceeds the income levels in the above chart may be subject to the AMT. However, reaching those levels does not automatically trigger the AMT. You can complete IRS Form 6251 by hand, use tax software programs or hire a professional tax preparer to determine if you owe the AMT and, if so, calculate the amount you owe.
The IRS has set income levels to determine which rate you’re charged for your AMT. If your income is below the stated level in the chart below, you’re taxed at 26 percent. If your income is over the stated level, you’re taxed at a rate of 28 percent on the excess income.
|Filing status||2021 AMT tax rate income level||2020 AMT tax rate income level|
|Single or head of household||$199,900||$197,900|
|Married, filing separately||$99,950||$98,950|
|Married, filing jointly||$199,900||$197,900|
This means that for a single person who earned more than $73,600 in 2021, but less than $199,900, the AMT rate is 26 percent. If that person earned more than $199,900, the AMT tax rate goes up to 28 percent.
The AMT exemption — the amount of income taxpayers can exempt before triggering AMT — eventually phases out at 25 cents per dollar earned once income has reached the thresholds in the chart below. In other words, you can no longer exempt any income from the AMT if your income surpasses these levels.
|Filing status||2021 AMT phaseout threshold||2020 AMT phaseout threshold|
|Single or head of household||$523,600||$518,400|
|Married, filing separately||$523,600||$518,400|
|Married, filing jointly||$1,047,200||$1,036,800|
How the AMT can impact your eligibility for tax breaks
With the AMT, many of the items you could deduct for your standard taxes no longer apply. Under the AMT:
- You do not receive the standard deduction or personal exemptions.
- You cannot deduct state and local taxes.
- Medical expenses must exceed 7.5 percent of your gross income to be deducted.
- Home equity loan interest is restricted. It can only be deducted if the money is used solely to pay for home improvements.
- Real estate property taxes are disallowed as deductions under the AMT.
- Some tax credits that reduce your regular tax liability do not reduce what you owe under the AMT. Once you add back these disallowed items and run the numbers, you might be subject to a bigger IRS bill if your taxable income exceeds the annual AMT exemption amount for your filing status.
Additional tax breaks not allowed under the AMT that affect predominantly high-income people are:
- Incentive stock options.
- Intangible drilling costs.
- Tax-exempt interest from certain private activity bonds.
- Depletion and accelerated depreciation on certain leased personal or real property.
Determining your financial liability as a result of the AMT can be complicated. Tax software programs or a tax professional may be the best way to determine what you owe. Once you complete this year’s tax return, seek the guidance of an accountant or tax professional to find ways to potentially reduce your tax liability going forward.