What Is the Alternative Minimum Tax?

IRS’s inflation updates for revenue procedure also affected the Alternative Minimum Tax exemption. The Alternative Minimum Tax (AMT) is an important concept in the realm of taxation. It can have a significant impact on one’s tax liability and should not be overlooked. Let’s talk about what the AMT is, who has to pay it, and how it works.

Alternative Minimum Tax: The Basics

The AMT is a type of tax that certain taxpayers must pay in addition to their regular income taxes. It was created to ensure that taxpayers with higher incomes pay at least a minimum amount of taxes. Think of it as a tax floor – just as each tax bracket has a floor (minimum threshold) and ceiling (maximum threshold), your ability to deduct and use credits to lower your tax liability also has a lower limit.

It exists in parallel to the traditional tax system and can result in higher federal income taxes for certain taxpayers. For example, high-income individuals may be required to pay more taxes under the AMT than they would have under a standard calculation. Understanding how the AMT works and when it applies is vital for any taxpayer facing these potentially higher taxes.

When you pay an AMT, some or all of that additional tax is going to be put toward future income that will be taxed due to differences in the rules. In that instance, you’ll be eligible for a credit that you can use to cover your future tax liabilities.

Why is there an alternative minimum tax? You’d have to go back to 1969. That year, 155 people with high incomes were able to use enough tax deductions to completely avoid paying anything in taxes.

What Triggers AMT?

The AMT is triggered by high household income, large capital gains, and certain stock options. If you have exercised certain stock options as an employee, this capital will only be taxable under the AMT if the paper profit of those options is high enough by the rule’s calculations. This includes stock options you have not sold.

When you are calculating the AMT credit, you simply carry forward those gains and spread them out across future years. When your AMT credit becomes usable (i.e. when the gains were made in previous years and you are calculating the current year’s regular income tax), it will lower the current year’s amount owed by the exact dollar amount you paid in recent years.

Who Owes Alternative Minimum Tax for Tax Year 2022?

Anyone with an income (or combined income) that will exceed the AMT exemption amounts will more than likely have to pay the alternative minimum tax.

High earners who have previously been AMT payers or are unsure if they meet the thresholds will, in essence, have to calculate their taxes twice. First, they’ll calculate their taxes under regular federal income tax rules. And secondly, they’ll do those same calculations using the AMT rules (which are stricter). Once those calculations are done, those individuals and businesses will have to pay whichever amount is higher.

The AMT exemption amounts for 2022 (with taxes due April 2023) are as follows:

For single filers: the exemption amount is $75,900 and the income at which exemptions will begin to phase out is $539,900
For those who are married, filing jointly: the exemption amount is $118,100. Exemptions begin to phase out at $1,079,800.
For those who are married, filing separately: the exemption amount is $$59,050. Exemptions begin to phase out at $539,900.

If your income is above the phase-out thresholds, you are more than likely going to be affected by the AMT. It’s also important to keep this rule in mind if you have been exercising stock options (buying stock at a discounted price – typically not a taxable event) that generate paper profit or if you will be realizing a large capital gain this year that puts you over the threshold.

The Future of AMT

Originally, the alternative minimum tax was aimed at ensuring wealthy individuals were paying a fair share of taxes. But as inflation rose, more middle-class earners were hitting those income thresholds (originally set around $200,00 per year).

The 2017 Tax Cuts and Jobs Act (TCJA) changed the AMT rules slightly. It included an increase in AMT exemptions as well as an increase in the phase-out thresholds. This allowed more people, particularly those on the bottom of the AMT eligibility spectrum, to be left out of something that wasn’t truly created for their tax brackets relative to inflation. It’s important to note here, however, that the TCJA currently only applies to tax years 2018 through 2025 unless Congress makes the changes permanent or extends that window.

Can I Reduce the Amount I Owe Under AMT?

The minimum goal for every taxpayer is typically to try and look for enough deductions, credits, and other means within the tax code to get as close to owing $0 as possible. Of course, everyone loves a good tax refund, but the least favorable outcome after tax filing is owing money to the IRS.

Because of how the AMT rule works, your regular tax deductions and credits can become unusable for the year. This includes deductions for state income tax and local taxes as well as long-term capital gains and certain dividends.

So, what can you do to reduce the amount you owe under the alternative minimum tax? Many tax experts would advise you to lower your adjusted gross income by maxing out all contributions to 401(k), IRA, and health savings accounts.

If you are unsure whether the AMT will apply to you – or how it will work when you do your taxes – we recommend you reach out to a trusted tax expert who will be able to set you on the right track quickly.

Keep Your Tax Information Accurate

The alternative minimum tax was created to ensure all taxpayers are paying their fair share of taxes. Accurate reporting and completion of information returns, and other forms, are essential in this process as well.

eFile360 is the most cost-effective e-filing service for IRS 1099 forms. We also assist with the filing of 1098, ACA, and W-2 information return forms as well.

Additional menu