Alternative Minimum Tax
The minimum amount that an individual or joint filers will need to pay no matter how many tax deductions or credits the person or persons claim.
Alternative Minimum Tax Details
U.S. tax filers that earn above a certain threshold will need to calculate the alternative minimum tax (AMT) and what they may need to pay. The AMT recalculates what the filer owes in taxes after adding back in certain items. You calculate the AMT under a different set of rules than those usually used for filing taxes.
Some deductions are called preferential deductions, which the IRS adds back into the tax filer’s income, which helps calculate the alternative minimum taxable income or (AMTI). To figure out the final taxable amount, called the tentative minimum tax (TMT), subtract the AMT exemption from the AMTI. This amount is taxed using the relevant rate schedule.
The filer pays the full TMT amount. If the TMT is higher than the filer’s regular tax liability, the filer pays the regular tax in addition to the amount that the TMT exceeds the regular tax. Filers need to fill out Form 6251 to find out if they owe any AMT or not.
Example of Alternative Minimum Tax
The 2020 AMT exemption threshold is $72,900 for individuals is and $113,400 for married joint filers. For the year 2021, the individual threshold is $73,600 and the married joint filers threshold is $114,600. So if you are an individual filing your 2021 taxes and made over $73,600, you may need to calculate and pay an AMT. If you are a married couple jointly filing your 2021 taxes and you made over $114,600, you may need to pay an AMT.
Tax filers who have an AMTI over a certain amount do not qualify for the AMT exemption. The 2020 phase-out begins at $518,400 for individuals and $1,036,800 for married couples filing jointly. The 2021 phase out is $523,600 for individuals and $1,047,200 for married couples filing jointly.
Tax software can help filers figure out if a filer needs to calculate an AMT or if they need to pay. If a filer does not want to use tax software, he or she can use IRS Form 6251. Medical expenses, home mortgage interest, and other deductions are taken into account when seeing if the deductions go beyond the limit set by the IRS. The IRS uses these and other pieces of information and formulas to calculate the AMT.
Significance of Alternative Minimum Tax
AMT was designed to make sure tax filers still paid their fair share of taxes no matter how many deductions or credits they may be able to claim. At first, there was nothing in the AMT rules that did not allow for inflation or tax cuts.
That caused a problem called bracket creep, which is when upper-middle-income tax filers would become subject to the tax meant for the wealthy tax filers. In 2015, Congress passed a law fixing this problem.
Now, if you end up needing to calculate your AMT, do not think that all your deductions go out the window. As you go through the tax software or Form 6251, certain deductions are still allowed.