Navigating the Alternative Minimum Tax (AMT) – Individuals

by Mary Varano

Alternative minimum tax can affect businesses, but it’s also something to be aware of as an individual tax payer as well.

What is Alternative Minimum Tax?

The alternative minimum tax, or AMT, is an alternate tax system that works to expand the amount of income that is taxed. AMT requires some taxpayers, usually higher earners, to calculate tax responsibility twice. First using the usual income rules and then using AMT. Whichever amount is higher, the tax payer is owes.

Why Does the Alternative Minimum Tax Exist?

The AMT first came about in 1969 when Congress saw over 150 taxpayers legally use so many deductions, credits, and other tax breaks that they did not pay any federal income tax. To remedy this, Congress instituted the AMT in an effort to make the tax system more fair.

Unfortunately, AMT hasn’t been indexed to account for inflation, as standard income tax is, so every year, more and more middle-income taxpayers are subject to AMT.

How Do I Know If I Owe the AMT or Regular Income Tax?

Properly calculating AMT can be very confusing, so the tax professionals at Corrigan Krause highly recommend engaging the services of a CPA firm. Calculating AMT is part of what our tax pros do for every client, so if you’d like to become a Corrigan Krause client, click here to connect with us.

Can I Calculate AMT?

If you’d like to do the AMT calculations yourself, you’ll want to determine your taxable income using IRS Form 6251. As you’re filling the form out, you’ll notice there are fewer tax exclusions and tax deductions. Subtract the AMT version of your taxable income from your exemption amount.

Exemption amount for 2022 (taxes due April 2023) are:

  • Single: $75,900
  • Married, filing jointly: $118,100

Exemptions phase out, however, at the following levels:

  • Single: $539,900
  • Married, filing jointly: $1,079,800

Now multiply the remaining amount by the appropriate AMT tax rate. IRS Form 6251 clarifies when to use which rate, either 26% or 28%. If you qualify for the AMT foreign tax credit, subtract that now as well. Now what remains is your income tax under the AMT. If this number is higher than your income under the regular income rules, you’re responsible for the AMT amount.

Is There Anything I Can Do to Avoid Paying the AMT Next Year?

The AMT is specifically designed to ensure higher earners still pay federal income tax, so there isn’t much that can be done to avoid paying AMT. However, taking time earlier in the year to see if you might be vulnerable to paying AMT, you can take legal steps to lower your adjusted gross income by maxing out contributions to 401(k)s, IRAs, or HSAs. Additionally, keep watch on your long-term capital gains.

Corrigan Krause Can Help

The tax pros at Corrigan Krause help clients navigate the sometimes confusing tax code. Email for more information on becoming a client.