Paying the IRS - Individual Alternative Minimum Tax (AMT)

November 14, 2024

As if the regular federal income tax rules aren’t complicated enough, you also may have to cope with a shadow tax system called the alternative minimum tax (AMT).

The Alternative Minimum Tax (AMT) is a system in which, in addition to the regular federal tax calculation, income taxes are recalculated using different rules for taxpayers who have skillfully used tax benefits to pay the amount of tax they should have owed. If a high-income taxpayer has certain types of favorable income or qualifies for certain deductions or other tax benefits, but the Tentative Minimum Tax is greater than the regular tax, the excess of the tentative minimum tax over the regular income is the AMT. The alternative minimum tax applies to higher-income individuals, as well as to trusts and estates.

Let’s take a look at how AMT is calculated.

The AMT is computed as the excess of the tentative minimum tax over the regular tax. Thus, the AMT is owed only if the tentative minimum tax is greater than the regular tax. The tentative minimum tax is figured separately from the regular tax. In general, the tentative minimum tax is computed by:

1. recomputing taxable income by eliminating or reducing certain exclusions deductions such as Interest Income of Tax Preference Items, Taxes reduced by taxable refunds of Itemized deductions, and taking into account timing differences with respect to when certain items are used in computing regular taxable income and alternative minimum taxable income (AMTI),

2. subtracting the appropriate AMT exemption amount,

3. multiplying the amount computed in (2) by the appropriate AMT tax rates, and

4. subtracting the AMT foreign tax credit.

The law sets the AMT exemption amounts and AMT tax rates annually, with special adjustments for capital gains and qualified dividends.

AMT Rates

The tentative minimum tax for individuals is equal to:

1. 26 percent of the taxpayer’s AMTI in excess of the AMTI exemption amount up to a certain threshold amount; plus

2. 28 percent of any AMTI in excess of the threshold amount.

For 2024, the AMT exemption amount is $133,300 for married individuals filing jointly or surviving spouses, $85,700 for individuals filing as single or head of household, and $66,650 for married individuals filing separately. The threshold at which the AMT exemption begins to phase out is $1,218,700 for married individuals filing jointly or surviving spouses, and $609,350 for individuals filing as single, head of household, or married filing separately.

The excess taxable income threshold for the 28-percent tax rate is $232,600 ($116,300 for married taxpayers filing separate returns). The AMT exemption amount of a child subject to the "kiddie tax" is the sum of the child’s earned income plus $9,250.