The Alternative Minimum Tax (AMT) applies to taxpayers whose income is above a certain threshold. The tax ensures that those taxpayers don’t abuse available tax breaks and pay at least a minimum amount of tax.
History of the AMT
The Alternative Minimum Tax was enacted in 1969 to prevent taxpayers from having too many tax breaks. Rather than eliminating tax breaks, a minimum threshold was created. It wasn’t until 2012, however, that the AMT was permanently indexed for inflation to avoid the consequences of bracket creep.
With the passage of the Tax Cuts and Jobs Act in 2017, the AMT exemptions and phaseout thresholds were increased (these will revert in 2025).
How does the AMT work?
The AMT is essentially an alternate tax system that is used in parallel to the regular U.S. tax system for high-income earners. If subject to AMT, taxpayers must complete Form 1040 and Form 6251 and then pay the higher amount of tax owed. Under the AMT, certain deductions are eliminated or reduced, including but not limited to the standard deduction, depreciation, passive activities, loss limitations, and research and experimental costs. This means that potentially, your taxable income could be higher.
While the ordinary tax system is comprised of seven income tax brackets, there are only two tax rates for the AMT: 26% and 28%. Up to an Alternative Minimum Tax Income (AMTI) of $220,700, taxpayers must pay the 26% AMT rate. At $220,700 or above, taxpayers are subject to the 28% AMT rate. For 2023, the exemption amount is $81,300 for single filers and $126,500 for married couples filing jointly. Phaseouts begin at $578,150 for single filers and $1,156,300 for married joint filers.
How do you know whether you have to pay the Alternative Minimum Tax?
Your tax professional will calculate the income difference between the two forms, 1040 and 6251, to determine whether you owe Alternative Minimum Tax. However, if you find yourself claiming significant itemized deductions instead of the standard deduction, live in an area subject to high State and Local Taxes, or if you exercise and hold incentive stock options, you might be more likely to have to pay AMT.
How do you minimize your AMT liability?
To avoid triggering the AMT threshold, you may want to consider a few options that will help keep your adjusted gross income low, such as contributing the max amount to your retirement accounts, contributing as much as you can toward your FSA or HSA, or working with your financial advisor to rebalance your portfolio. Additionally, if you have paid AMT in the past, you may qualify for a tax credit which can help.
If you owe the Alternative Minimum Tax in 2023
If you do owe the Alternative Minimum Tax this year, the tax professionals and financial advisors at Chatterton & Associates can help to coordinate a tax projection session with you to determine ways to reduce your tax liability now and in the future.
Contact us today so that we can discuss and help you anticipate potential tax burdens as well as savings and opportunities.
The Team at Chatterton & Associates
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc nor its representatives provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.