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Alternative
Minimum Tax

Understand how to calculate AMT, identify preference items and adjustments, and determine when the AMT applies to individual taxpayers.

CPA Regulation (REG)

What Is the Alternative Minimum Tax?

The Alternative Minimum Tax (AMT) is a parallel tax system designed to ensure that high-income taxpayers who benefit from certain deductions and exclusions pay at least a minimum amount of tax. It was created to prevent wealthy individuals from using tax preferences to reduce their regular tax liability to zero.

Why the AMT Exists

Tax Fairness
Prevents high-income taxpayers from paying little or no tax through extensive use of deductions, exclusions, and credits.
Revenue Protection
Ensures the government collects a baseline amount of revenue from taxpayers who benefit most from tax preferences.
Parallel System
Operates as a separate calculation alongside regular income tax, with its own set of rates, exemptions, and rules.

The Core AMT Formula

Regular Taxable Income
\( + \text{Adjustments} + \text{Preferences} = \text{AMTI} \)
 - AMT Exemption Amount
Apply AMT Rates (\(26\%\) / \(28\%\))
= Tentative Minimum Tax (TMT)
\( \text{AMT} = \text{TMT} - \text{Regular Tax (if positive)} \)

Computing AMTI

Alternative Minimum Taxable Income (AMTI) is the starting point. Begin with regular taxable income, then add back specific adjustments and tax preference items that were deducted or excluded under regular tax rules.

1
Start with regular taxable income (before the QBI deduction, if applicable).
2
Add back AMT adjustments: state/local tax deduction, certain depreciation differences, incentive stock option (ISO) spreads, and more.
3
Add tax preference items: private activity bond interest, percentage depletion in excess of basis, pre-1987 accelerated depreciation.
4
Result = AMTI. This is the income base used for the AMT calculation.

Adjustments vs. Preferences

Adjustments Preference Items
Direction Can increase or decrease AMTI Always increase AMTI
Nature Timing differences (depreciation, gain/loss) Permanent exclusions or excess deductions
Examples State/local taxes, ISO spread, MACRS vs. ADS depreciation Private activity bond interest, excess depletion
Impact Often reverse in later years Typically do not reverse

The AMT Exemption Amount

Once AMTI is calculated, taxpayers subtract an exemption amount that varies by filing status. This exemption phases out for higher-income taxpayers, reducing the benefit.

Single / HoH
Exemption: \($81,300\) (2023). Phaseout begins at AMTI of \($578,150\).
MFJ
Exemption: \($126,500\) (2023). Phaseout begins at AMTI of \($1,156,300\).

AMT Tax Rates

\(26\%\)
First \($220,700\)
(MFJ: \($110,350\))
of AMTI over exemption
 Lower bracket
\(28\%\)
Excess over \($220,700\)
(MFJ threshold)
of AMTI over exemption
 Higher bracket Net capital gains taxed at regular capital gains rates

How to Calculate the AMT

1
Start with regular taxable income from the taxpayer's Form 1040.
2
Add back adjustments (e.g., state/local tax deduction, ISO exercise spread, depreciation timing differences).
3
Add preference items (e.g., private activity bond interest, excess depletion).
4
Result = AMTI. Subtract the applicable AMT exemption amount (after phaseout, if any).
5
Apply the AMT rates (\(26\%\) on the first \($220,700\); \(28\%\) on the excess) to compute the Tentative Minimum Tax (TMT).
6
Compare TMT to regular tax. If \(\text{TMT} > \text{Regular Tax}\), the difference is the AMT owed.

Worked Example: Basic AMT

Scenario: A single taxpayer has regular taxable income of \($200,000\). She exercised ISOs with a bargain element (spread) of \($50,000\) and deducted \($10,000\) in state taxes. Her regular tax liability is \($41,556\).

1
Regular taxable income: \($200,000\)
2
Add: ISO spread \(+ $50,000\), state tax add-back \(+ $10,000\)
3
AMTI: \($200{,}000 + $50{,}000 + $10{,}000 = \) \($260,000\)
4
Exemption: \($81{,}300\) (no phaseout since AMTI < \($578{,}150\))
5
AMT base: \($260{,}000 - $81{,}300 = $178{,}700\)

Worked Example: Exemption Phaseout

Scenario: A single taxpayer has AMTI of \($700,000\). What is the usable AMT exemption amount?

1
Base exemption (single): \($81,300\)
2
AMTI exceeds threshold by: \($700{,}000 - $578{,}150 = \) \($121,850\)
3
Phaseout reduction: \($121{,}850 \times 25\% = \) \($30,462.50\)
4
Usable exemption: \($81{,}300 - $30{,}462.50 = \) \($50,837.50\)

Worked Example: Higher AMT Bracket

Scenario: A married couple (MFJ) has AMTI of \($1,300,000\). The MFJ exemption is \($126,500\) with a phaseout threshold of \($1,156,300\). Their regular tax is \($300,000\). Compute AMT.

1
Excess over phaseout threshold: \($1{,}300{,}000 - $1{,}156{,}300 = $143{,}700\). Reduction: \($143{,}700 \times 25\% = $35{,}925\). Usable exemption: \($126{,}500 - $35{,}925 = \) \($90,575\)
2
AMT base: \($1{,}300{,}000 - $90{,}575 = \) \($1,209,425\)
3
First \($220{,}700\) at \(26\%\): \($220{,}700 \times 0.26 = \) \($57,382\)
4
Remaining: \($1{,}209{,}425 - $220{,}700 = $988{,}725\) at \(28\%\): \($276,843\)
5
TMT: \($57{,}382 + $276{,}843 = \) \($334,225\)

Key AMT Adjustments

State/Local Taxes
SALT deductions taken on Schedule A must be added back for AMT purposes. No deduction allowed under AMT.
ISO Exercise
The spread (FMV minus exercise price) on incentive stock options is an AMT adjustment in the year of exercise.
Depreciation
Difference between MACRS (regular) and ADS (AMT) depreciation methods is added or subtracted as an adjustment.
Medical Expenses
Under current law, the same \(7.5\%\) AGI floor applies for both regular tax and AMT. No adjustment needed post-TCJA.

Tax Preference Items

Preference items are always added to regular taxable income when computing AMTI. Unlike adjustments, they never reduce AMTI.

1
Private Activity Bond Interest: Tax-exempt interest from private activity bonds (issued after 8/7/1986) is added to AMTI.
2
Excess Percentage Depletion: The amount by which percentage depletion exceeds the adjusted basis of the property.
3
Pre-1987 Accelerated Depreciation: Excess of accelerated over straight-line depreciation on real property placed in service before 1987.
4
Exclusion for Small Business Stock: For certain qualifying small business stock, \(7\%\) of the excluded gain under Section 1202 is a preference item.

Common Mistakes to Avoid

✕ Confusing Direction
Assuming all items increase AMTI. Adjustments can go either way: only preferences always increase AMTI.
✕ Forgetting Phaseout
Using the full exemption amount without checking if AMTI exceeds the phaseout threshold. The exemption can be reduced to zero.
✕ Wrong Rate Bracket
Applying \(28\%\) to the entire AMT base. The first \($220,700\) is taxed at \(26\%\): only the excess is at \(28\%\).
✕ Capital Gains Error
Taxing long-term capital gains at AMT rates. Capital gains retain their preferential rates (\(0\%\)/\(15\%\)/\(20\%\)) under AMT.

Regular Tax vs. AMT Summary

Regular Tax AMT
Tax Base Taxable income AMTI minus exemption
Rates \(10\%\) to \(37\%\) (7 brackets) \(26\%\) and \(28\%\) (2 brackets)
SALT Deduction Allowed (capped at \($10{,}000\)) Not allowed
ISO Spread Not taxed until stock sale Taxed in year of exercise
Private Bond Interest Tax-exempt Included in AMTI
Exemption Standard deduction AMT exemption (phases out)
Capital Gains Preferential rates Same preferential rates

Question 1 of 5

A taxpayer's tentative minimum tax (TMT) is \($55,000\) and their regular tax liability is \($48,000\). What is the taxpayer's AMT?

Question 2 of 5

Which of the following is a tax preference item that is always added to regular taxable income when computing AMTI?

Question 3 of 5

A single taxpayer has AMTI of \($650,000\). The AMT exemption for single filers is \($81,300\) with a phaseout threshold of \($578,150\). What is the usable exemption?

Question 4 of 5

Under the AMT, how are net long-term capital gains treated?

Question 5 of 5

A married couple (MFJ) has an AMT base (AMTI minus exemption) of \($300,000\). The \(26\%\) bracket threshold is \($220,700\). What is their tentative minimum tax?