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Conceptually, it is imposed instead of, rather than in addition to, regular tax. AMT is imposed if the tentative minimum tax exceeds the regular tax. Regular tax is the regular income tax reduced only by the foreign and possessions tax credits.
This credit may not reduce regular tax below the tentative minimum tax. Alternative minimum taxable income is regular taxable income, plus or minus certain adjustments, plus tax preference items, less the allowable exemption as phased out. Partnerships and S corporations are generally not subject to income or AMT taxes,  but, instead, pass-through the income and items related to computing AMT to their partners and shareholders.
Exemptions[ edit ] The deduction for personal exemptions is not allowed. Instead, all taxpayers are granted an exemption that is phased out at higher income levels. Due to the phase-out of exemptions, the actual marginal tax rate 1. The married-filing-separately MFS phase-out does not stop when the exemption reaches zero, either in or This is because the MFS exemption is half of the joint exemption, but the phase-out is the full amount, so for MFS filers the phase-out amount can be Alternative minimum tax to twice the exemption amount, resulting in a 'negative exemption'.
This prevents a married couple with dissimilar incomes from benefiting by filing separate returns so that the lower earner gets the benefit of some exemption amount that would be phased out if they filed jointly.
When filing separately, each spouse in effect not only has their own exemption phased out, but is also taxed on a second exemption too, on the presumption that the other spouse could be claiming that on their own separate MFS return.
Small corporations are exempt from AMT. Once a corporation ceases to be a small corporation for AMT, it is never again a small corporation. This limit is applied to all members of an affiliated group as if they were a single corporation. Depreciation and other adjustments[ edit ] All taxpayers claiming deductions for depreciation must adjust those deductions in computing AMT income to the amount of deduction allowed for AMT.
When a taxpayer is required to recognize gain or loss on disposal of a depreciable asset or pollution control facilitythe gain or loss must be adjusted to reflect the AMT depreciation amount rather than regular depreciation amounts. In addition, corporate taxpayers may be required to make adjustments to depreciation deductions in computing the adjusted current earnings ACE adjustment.
Adjustments are also required for the following: The phase-out of itemized deductions does not apply. No deduction is allowed for state, local, or foreign income or property taxes. A recovery of such taxes is excluded from AMTI. No deduction is allowed for most miscellaneous itemized deductions.
This includes interest resulting from refinancing such debt. In addition, investment interest expense is deductible for AMT only to the extent of adjusted net investment income. Other non-business interest is generally not deductible for AMT. An adjustment is also made for qualified incentive stock options and stock received under employee stock purchase plans.
Circulation and research expenses must be capitalized and amortized. These include further depreciation adjustments for most assets, adjustments to more closely reflect earnings and profits, cost rather than percentage depletion, LIFO, charitable contributions and certain other items.
Certain adjustments apply with respect to farm and passive activity loss rules for insolvent taxpayers. Taxpayers may elect an optional year write-off of certain tax preference items in lieu of the preference add-back. Note that in prior years there were certain other tax preference items relating to provisions now repealed.
Credits[ edit ] Credits are allowed against AMT for foreign taxes  and certain specified business credits.AMT is designed to prevent taxpayers from using breaks to escape their fair share of tax liability by recalculating taxes according to a specific formula.
Jan 31, · Topic Number - Alternative Minimum Tax Under the tax law, certain tax benefits can significantly reduce a taxpayer's regular tax amount. The alternative minimum tax (AMT) applies to taxpayers with high economic income by setting a limit on those benefits.
Several other possible tax deductions may also be added back to a household’s income—Form , Alternative Minimum Tax-Individuals, has more than 60 lines—often making income that is subject to the alternative minimum tax higher than regular adjusted income. The Alternative Minimum Tax is a mandatory alternative to the standard income tax.
It gets triggered when taxpayers make more than the exemption and use many common itemized deductions. The reason the AMT catches those in higher tax brackets is because it eliminates many of those deductions.
BREAKING DOWN 'Alternative Minimum Tax - AMT' The difference between a taxpayer's AMTI and his AMT exemption is taxed using the relevant rate schedule.
This yields the tentative minimum tax (TMT. The AMT is a tax system that works in parallel with the regular federal income tax system—while some taxpayers use the regular system, others must use the AMT system. The AMT has its own set of forms, rates, rules, and brackets, and requires taxpayers to calculate their federal income tax using this system.