6 Things You Should Know About the Alternative Minimum Tax (AMT)

Updated for tax year 2023.

Don’t let the alternative minimum tax catch you by surprise this tax season. The alternative minimum tax (AMT) was created in 1969 to keep a small number of wealthy taxpayers from using tax loopholes to avoid paying taxes. Instead of closing the loopholes, Congress devised a plan to calculate a person’s tax two different ways — once with the traditional tax system and once with a special “alternative” system. The taxpayer then pays the higher of the two results.

As you may imagine, this double system can be complex and confusing. Initially, the system didn’t bother many people as it only applied to especially well-off taxpayers. However, the AMT amounts did not keep up with inflation and, unfortunately, quickly began to affect more and more Americans.

Here’s how to know if the alternative minimum tax could affect you and what you can do about it.

1. If your income was less than $81,300 in 2023, you generally won’t have to pay AMT.

A certain amount of income per year is exempt from the AMT. This is called your exemption. If your income is less than the exemption, you generally don’t have to worry about the AMT.

For tax years 2023 and 2024, the AMT exemption amounts for each tax filing status are:

Your income for this purpose is calculated from your adjusted gross income (AGI), with certain changes required by the AMT. It’s best to use these amounts as a rule of thumb for determining whether the AMT may apply to you. Even if your income exceeds the exemption amounts listed above, it doesn’t automatically mean you’ll be taxed at AMT rates.

For reference, the AMT tax brackets for 2023 are:

The AMT exemptions phase out at 25 cents per dollar earned once your AMT income reaches the phaseouts listed above.

2. Some tax breaks are not allowed under AMT rules.

Some kinds of income and tax deductions are deductible for the regular income tax but not under AMT rules. A few examples include the standard deduction or personal exemptions, state and local taxes, and tax breaks that affect mostly high earners such as incentive stock options.

However, that doesn’t automatically mean these deductions and exemptions won’t do you any good. As we mentioned before, the AMT uses its own set of tax rates, 26% or 28%, and your total AMT may still be lower than the regular income tax amount.

Remember, you pay the highest amount between the regular income tax and the AMT. Unless you have significant deductions and other tax preference items not allowed by the AMT, you probably still only owe regular income tax.

3. You may need to file Form 6251 if you have specific AMT items.

If you need to report any of the following items on your tax return, the IRS requires you to attach Form 6251, Alternative Minimum Tax – Individuals, to your federal income tax return, even if you do not owe AMT:

1. The qualified electric vehicle credit.
2. The personal-use part of the alternative fuel vehicle refueling property credit.
3. The credit for prior year minimum tax.
4. Any general business credit (and either line 6 or 25 of Form 3800 is more than zero).

Other less common items include Section 1202 exclusions, intangible drilling, circulation, research, experimental or mining costs, tax-exempt interest from private activity bonds, etc.

Don’t worry if this sounds confusing. If Form 6251 is required, TaxAct® will populate the form for you based on the information you give us.

4. A little tax planning can help you avoid the AMT.

The best way to plan for the AMT is to read your annual tax return, including Form 6251, carefully.

Your tax strategy depends on your income and the type of tax benefits that trigger the AMT in your case. For example, if accelerated depreciation deductions cause you to pay AMT, you may want to choose a different depreciation method.

Simply knowing how the AMT works can help you make better tax decisions. If you have itemized deductions close to the amount of your standard deduction, you may be better off taking the itemized deductions to avoid the AMT because the standard deduction is not allowed under AMT. TaxAct can help you determine if itemizing or taking the standard deduction will result in a lower tax bill.

If you are subject to the AMT in some years but not others, you can try to time deductible expenses for the years in which you get the most tax benefit.

5. If you pay AMT, you may get a credit later.

Some of the tax items that affect the AMT are what the IRS calls deferrals. These items “defer” tax under the regular tax system rather than simply lowering it within a given year.

For example, accelerated depreciation lets you take depreciation deductions early on within an asset’s life and defers any tax liabilities to later years. Once the depreciation of an asset has been recognized, it is no longer available to shelter taxable income in the following years.

The IRS makes up for this in the following years by giving you an AMT credit when applicable. TaxAct can help calculate potential AMT amounts available to you on Form 8801, Credit for Prior Year Minimum Tax.

6. The AMT is complicated, but TaxAct does the hard work.

TaxAct can help determine if you’re required to pay the AMT when you file using our tax preparation software. Our guided Q&A interview will help us determine if you need Form 6251 to finish your tax return. If you do, TaxAct will complete the form using your provided information.

For tax planning purposes, if you used a tax professional or other tax software product in previous years, you can find Form 6251 in your return and see how the AMT affected you, allowing you to make more informed tax decisions.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.