What is the Alternative Minimum Tax? (Updated for 2024)

This comprehensive guide will provide a deep dive into what AMT is, how it’s calculated, common adjustments, and tax planning strategies to minimize your AMT exposure.

Table of contents

1. What is the Alternative Minimum Tax (AMT)?
2. Who Pays Alternative Minimum Tax?
3. How is AMT Calculated?
4. Summary of AMT exemptions, tax rates, and phase-outs
5. AMT Exemption Amount Thresholds (Updated for 2024)
6. AMT Tax Rates (Updated for 2024)
7. AMT Exemption Phase Outs for High-Income Taxpayers
8. AMT with Incentive Stock Options
9. AMT Adjustments and Preferences
10. AMT Carryforward Credits & Form 8801
11. AMT and the Tax Cuts and Jobs Act (TCJA) of 2017
12. State-Level AMT and Its Implications
13. How to Minimize AMT
14. Common Misconceptions about AMT
15. AMT Frequently Asked Questions

What is the Alternative Minimum Tax (AMT)?

The Alternative Minimum Tax (AMT) is a federal tax system within the United States designed to ensure that all individuals and corporations pay their fair share of taxes.

AMT was introduced in 1969 in response to high-income Americans taking advantage of loopholes in the tax code to bring their taxable income to zero. Over the years, AMT has evolved due to changes in tax laws and inflation, which has led to its application to a broader range of taxpayers.

Who Pays Alternative Minimum Tax?

AMT could apply to you if your regular income tax calculation results in a lower tax liability than the AMT calculation. This can happen if you have certain types of deductions, credits, or income sources, such as equity compensation including stock options. It’s important to understand these triggers to make informed decisions about managing your tax liability.

How is AMT Calculated?

To calculate alternative minimum tax, you need to use IRS Form 6251 (Alternative Minumum Tax). Here’s how it generally works:

1. Start with your regular taxable income: Your taxable income is your adjusted gross income (AGI) minus your standard or itemized deductions and qualified business income deduction, if applicable.
2. Make AMT adjustments to your taxable income: Certain income and deductions that are treated differently under AMT rules need to be added back or adjusted. For instance, charitable contributions or mortgage interest payments.
3. Calculate your Alternative Minimum Taxable Income (AMTI): After making these adjustments, you’ll get your AMTI.
4. Subtract your AMT exemption from your AMTI: The exemption amount varies depending on your filing status and income.
5. Apply the AMT tax rate to get your tax liability: Your final tax bill will vary based on your AMTI level and other adjustments on Form 6251.

If the tax computed through this method is higher than your regular tax, then the difference between the two amounts is the AMT that you will owe.

Next, we’ll review details, including AMT exemptions and tax rates, that can help you understand the potential tax impact that AMT may have.

Summary of AMT exemptions, tax rates, and phase-outs

The tables below provide a summary for the tax years 2023 and 2024 of the AMT exemptions, tax rates, and the income level at which AMT exemption begins to phase out. 

The following sections of this article provide detailed explanations of exemptions, tax rates, phase-out thresholds, and more.

AMT Exemption Amount Thresholds (Updated for 2024)

The AMT exemption allows you to treat income up to the exemption amount as regular taxable income on which you’ll pay ordinary income tax, subject to deductions and credits you may be allowed to claim.

For the 2024 tax year, the AMT exemption is $85,700 for taxpayers filing as single and $133,300 for married couples filing jointly, per the IRS.

Generally, here’s how the AMT exemption amounts work:

• Any amount of your Alternative Minimum Taxable Income (AMTI), which is an adjusted form of your income, that is below the AMT exemption level is taxed as ordinary income tax.
• Any AMTI over the exemption amount is subject to the alternative minimum tax rates. After calculating what you owe for AMT, you will pay the higher amount between the AMT income tax and standard income tax.

AMT Tax Rates (Updated for 2024)

There are two tax rates associated with AMT: 26 percent and 28 percent. 

The table below shows how the AMT tax rates are applied to AMTI amounts after subtracting the exemption for the tax year 2024.

AMT Exemption Phase Outs for High-Income Taxpayers

The AMT exemption amounts begin to phase out—reducing by 25 cents for each dollar earned—once a taxpayer’s AMTI surpasses a certain income threshold.

For the tax year 2024, this exemption starts phasing out at $609,350 in AMTI for single filers and at $1,218,700 for married taxpayers filing jointly. Depending on an individual’s AMTI, their AMT exemption could be either reduced or eliminated, with the remaining amount subject to the AMT rate.

AMT with Incentive Stock Options

If you have equity compensation such as Incentive Stock Options (ISOs), AMT may impact your tax liability. With AMT, the spread between the price you paid for the stock options and what they’re worth when you exercise the options is counted as income when you calculate AMTI. 

In this example, let’s assume you exercise ISOs during the year:

• Your regular annual income, including your salary and the profit from the sale of stocks, is $200,000, excluding the spread on your exercised ISOs, which is valued at $50,000.
• Because of AMT, you would be required to include the $50,000 spread in your income for the year, which would result in a new AMTI of $250,000, and potentially additional taxes owed.
• If you are a single taxpayer without any adjustments to AMTI, for the tax year 2024, you would subtract the AMT exemption of $85,700 from $250,000, getting an AMTI of $164,300 which would be taxed at 26% under AMT tax rates.
• After calculating AMT with your ISOs, you would compare the AMT tax calculation to the regular tax calculation, and pay whichever is greater.

AMT Adjustments and Preferences

Just as personal income taxes can be adjusted based on deductions, credits, or supplemental income, so can AMT. The list of available AMT adjustments is extensive, and it’s best to work with a Harness Tax Advisor or other tax professional to stay up to date. However, to give you a glimpse of how AMT adjustments can affect your tax computation, we’ve highlighted a few of the most common ones below:

Here are some key AMT adjustments and preferences:

1. Tax shelter farm activities: The treatment of capital gains and losses from tax shelter farm activities can significantly differ from the regular tax treatment.
2. Charitable contributions of certain property: If you made a charitable contribution of property and had a different basis for AMT purposes, you may need to make an adjustment 1.
3. Business interest limitation: For AMT purposes, you need to complete an AMT Form 8990 using amounts adjusted for AMT.
4. Mortgage interest: For AMT, you may need to adjust for home mortgage interest deducted for a dwelling that isn’t a principal residence or qualified dwelling.
5. Related adjustments: If you have certain types of income or deductions, such as section 179 expense deduction or self-employed health insurance deduction, you may need to refigure these amounts for AMT.
6. AMT foreign tax credit: The alternative minimum tax foreign tax credit (AMT FTC) helps taxpayers reduce their AMT by avoiding double taxation on income earned outside of the United States.

These are just a few examples of the types of adjustments that might be needed for AMT. The rules are complex, and this list is only a summary. A complete list of AMT adjustments and preferences can be found on the IRS website.

AMT Carryforward Credits & Form 8801

If you’ve paid AMT in a previous year due to certain adjustments or preference items, you might be eligible for the Minimum Tax Credit (MTC) in future years. This credit can offset your regular tax liability, reducing the amount you owe.

The Minimum Tax Credit is essentially a way of recouping some of the AMT you’ve paid in the past. It’s not a refund, but it can lower your future tax bill.

Use the IRS Form 8801 (Credit for Prior Year Minimum Tax—Individuals, Estates, and Trusts) to calculate and claim the Minimum Tax Credit. The form has detailed instructions on how to calculate the credit, including how to account for certain special situations, such as the carryforward of disallowed foreign tax credits.

On Form 8801, you calculate the credit by first figuring out the difference between the tentative minimum tax in the year you’re claiming the credit and the tentative minimum tax in the year you paid the AMT. The result is your minimum tax credit for the current year, which you can carry forward to future years if you don’t use it all in the current year.

Remember that the rules for AMT and MTC are complex, and it may be helpful to consult with a Harness Tax Advisor or other qualified tax professional.

AMT and the Tax Cuts and Jobs Act (TCJA) of 2017

The Tax Cuts and Jobs Act of 2017  brought significant changes to AMT, making it less likely that many taxpayers will have to pay it. Key changes include:

• Increased exemption emounts: The TCJA significantly raised the AMT exemption amounts.
• Higher phase out thresholds: The points at which the exemption amounts begin to phase out were also dramatically increased.
• State and local tax deduction limit: The TCJA imposed a limit of $10,000 on the deduction for state and local taxes under the regular tax system, which aligns it more closely with the AMT rules and lessens the chance that this item will trigger AMT.

These changes mean that fewer taxpayers will be subject to AMT during the tax years 2018-2025. However, unless Congress takes further action, these provisions will sunset after 2025, and the AMT rules will revert to pre-TCJA levels.

State-Level AMT Tax Rates

As of 2024, four US states (California, Colorado, Connecticut, and Minnesota) impose a state-level AMT. The rules and tax rates for state-level AMT, and other state-level taxes, differ from the federal AMT, and the income thresholds and exemption amounts can also vary. 

Here is an overview of the state-level AMT rules for each of these states:

• California imposes an AMT rate of 7% which applies to taxpayers with specific adjustments and tax preference items. 
• Colorado imposes an AMT rate of 3.47%. It generally follows federal AMT rules and calculation methods, with some adjustments specific to Colorado. Colorado’s AMT exemption amounts and phase-out thresholds are the same as the federal AMT exemption amounts and phase-out thresholds.
• Connecticut imposes an AMT on individuals with certain tax preference items, such as tax-exempt interest from private activity bonds. The Connecticut AMT tax rate is the lesser of 19% of adjusted federal tentative minimum tax or 5.5% of adjusted federal alternative minimum taxable income.
• Minnesota imposes an AMT rate of 6.75%. It follows federal AMT rules and calculation methods, with some adjustments specific to Minnesota. 

State-level tax laws are subject to change and should be carefully monitored every year. If you live in one of these states, it’s essential to be familiar with the state-specific AMT rules, and other state-level tax implications to minimize your overall tax liability.

How to Minimize AMT

Navigating the rules of AMT requires proactive tax planning, especially for taxpayers with significant preference items like ISOs. Here are some specific strategies you can use to minimize your exposure:

1. Spread out ISO exercises: If you hold ISOs, you may consider spreading your exercises over multiple years to avoid a large AMT adjustment in a single year. This strategy could help manage your AMTI levels and, in turn, your AMT liability.
2. Leverage AMT credits: If you’ve paid AMT in previous years due to ISO exercises or other preference items, you may have generated AMT credits. These credits are not refundable but can be used to reduce your regular tax in future years when your regular tax is higher than your AMT.
3. State tax payment timing: If you’re subject to AMT, your state and local tax payments won’t provide any federal tax benefit. You might consider timing your state tax payments in a year when you’re not subject to AMT.
4. Home mortgage interest: Since AMT only allows a deduction for mortgage interest on loans used to buy, build, or improve your home, consider this when planning home equity borrowing or refinancing.
5. Leverage the AMT break-even workaround: By understanding the intricate interplay between regular tax and AMT systems, you can identify a point where both liabilities are the same, effectively minimizing your tax liability. Harness’s Equity Tax Insights tool provides an excellent platform for calculating this break-even point for ISO exercise and/or selling equity.

Common Misconceptions about AMT

1. AMT no longer applies after the TCJA. While the TCJA made significant changes that reduced the number of taxpayers subject to AMT, it did not eliminate it. High-income taxpayers and those with significant preference items may still be subject to AMT.
2. If I paid AMT last year, I will pay it this year too. Not necessarily. Your AMT liability can change from year to year based on your income, deductions, and preference items.

AMT Frequently Asked Questions

How do I know if I need to pay Alternative Minimum Tax (AMT)? 

To determine if you owe AMT, you must calculate your taxes using both the regular tax system and the AMT system. If your AMT liability is higher than your regular tax liability, you will need to pay the difference as AMT.

Can I get a credit for paying AMT in the past? 

Yes, you may be eligible for the Minimum Tax Credit (MTC) if you have paid AMT in previous years due to certain deferral items, such as exercising incentive stock options. The MTC can be used to offset your regular tax liability in future years, up to the point where your regular tax equals your AMT liability.

Does AMT affect my capital gains tax? 

While long-term capital gains and qualified dividend income are taxed at preferential rates under both regular tax and AMT, realizing substantial capital gains can still affect your AMT liability indirectly. A large capital gain may push your total income over the AMT exemption threshold or phase-out range, resulting in a higher AMT liability.

Do I need to file a separate form for AMT? 

Yes, to calculate and report AMT, you must complete Form 6251 and include it with your Form 1040. Form 6251 guides you through the process of determining your AMTI, applying the appropriate AMT tax rate, and calculating your AMT liability.

Is AMT adjusted for inflation? 

Yes, the IRS adjusts the AMT exemption amount and the phase-out thresholds for inflation each year. This helps to reduce the number of taxpayers affected by AMT over time.

Harness Can Help You Navigate AMT

Navigating the complexities of the Alternative Minimum Tax (AMT) system can be challenging, but with the support of an experienced tax advisor, you can make informed decisions to optimize your tax planning strategies. You can connect with a tax advisor using Harness’s Advisor Marketplace where you’ll find experienced accountants and financial advisors who can help you understand the nuances of AMT along with building personalized tax and financial strategies to meet your unique goals. 

Do you have questions about the Alternative Minimum Tax or want to explore other tax planning opportunities? Sign up for Harness today.

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