Alternative Minimum Tax - AMT Basics

AMT Basics

Each year a taxpayer must pay the greater of an Alternative Minimum Tax (AMT) or regular tax. The AMT is a nearly flat tax on taxable income as modified for AMT. As with regular Federal income tax, rates and exemptions vary by filing status. The lower rate and the exemption are phased out above certain income levels at 25% of AMT income. A lower rate applies (through 2012) on capital gains (and qualifying dividends). These amounts for 2009 and 2010 are reflected in the following table:

In addition, corporations with average annual gross receipts of $7,500,000 or less for the prior three years are exempt from AMT, but only so long as they continue to meet this test. Further, a corporation is exempt from AMT during its first year as a corporation. Affiliated corporations are treated as if they were a single corporation for all three exemptions ($40,000, $7.5 million, and first year).

To the extent AMT exceeds regular Federal income tax, a future credit is provided which can offset future regular tax to the extent AMT does not apply in a future year. However, this credit is limited: see further details in the "AMT credit against regular tax" section.

Regular tax used as a basis for computing AMT is found on the following lines of tax return forms: individual Form 1040 Line 44, or corporate Form 1120 Schedule J line 2 less foreign tax credit.

Under the AMT, no deduction is allowed for personal exemptions (other than the AMT specific exemption, which is larger than the personal exemption except for high income taxpayers), nor is the standard deduction. State, local, and foreign taxes are not deductible. However, most other itemized deductions apply at least in part. Significant other adjustments to income and deductions apply.

Individuals must file IRS Form 6251 and corporations must file Form 4626 if they have any net AMT due. The form is also filed to claim the credit for prior year AMT.

Other individual adjustments in computing AMT include:

• Miscellaneous itemized deductions are not allowed. These include all items subject to the 2% "floor", such as employee business expenses, tax preparation fees, etc.
• The home mortgage interest deduction is limited to interest on purchase money mortgages for a first and second residence.
• Medical expenses may be deducted only if they exceed 10% of Adjusted Gross Income, as compared to 7.5% for regular tax.
• Inclusion of the bargain element of an Incentive Stock Option when exercised, regardless of whether the stock can immediately be sold.

Many AMT adjustments apply to businesses operated by individuals or corporations. The adjustments tend to have the effect of deferring certain deductions or recognizing income sooner. These adjustments include:

• Depreciation deductions must be computed using the straight line method and longer lives than may be used for regular tax. (See MACRS)
• Deductions for certain "preferences" are limited. These include deductions related to:
  • circulation costs,
  • mining costs,
  • research and experimentation costs,
  • intangible drilling costs, and
  • certain amortization.
• Certain income must be recognized earlier, including:
  • long term contracts and
  • installment sales.

Certain other adjustments apply. Corporations are also subject to an adjustment (up or down) for adjusted current earnings. In addition, a partner or shareholder's share of AMT income and adjustments flow through to the partner or shareholder from the partnership or S corporation.

AMT is reduced by a foreign tax credit, limited based on AMT income rather than regular taxable income. Certain specified business tax credits are allowed.