Alternative Minimum Tax Definition

The alternative minimum tax is a different way to calculate your taxes. It applies to high-income earners and is meant to limit the tax benefits that some taxpayers use to reduce their regular tax bill. In this article, we discuss the definition of the alternative minimum tax, who pays it, and how to calculate it. 

What is the alternative minimum tax? 

The alternative minimum tax (or AMT) is another method to use when calculating taxes. This is a separate and additional calculation from the regular federal income tax. The AMT has its own tax rates, and the Internal Revenue Service (IRS) adjusts the AMT each year for inflation. 

The purpose of the AMT is to reduce or eliminate some tax breaks that taxpayers use to lower their tax bill. 

It works by capturing certain types of income that aren’t regularly taxed. You calculate your regular federal income tax bill and your AMT bill — using IRS Form 6251: Alternative Minimum Tax – Individuals — to see if there’s any difference. If there is, you must pay the AMT in addition to your regular tax amount. 

Who pays the alternative minimum tax?

Those who earn more than the exemption amount set by the IRS must calculate the AMT. The exemption amount is the amount of income taxpayers can earn before triggering the AMT. Here’s a breakdown of the 2021 AMT exemption amounts:

• Single or head of household: Up to $73,600
• Married, filing jointly: Up to $114,600
• Married, filing separately: Up to $57,300

Taxpayers who exceed those amounts may owe the AMT. The AMT exemption amount phases out at certain income levels, meaning at some point, you can’t exempt any income from the AMT. 

The AMT rates are 26% and 28%, depending on the individual’s income level. Those who earn less than the following amounts are taxed at 26%, and those who earn more pay 28% on the excess income:

• Single or head of household: $199,900
• Married, filing jointly: $199,900
• Married, filing separately: $99,950

If you’re unsure about whether you need to calculate the AMT, check out the IRS’s website or talk to a tax professional. 

Alternative Minimum Tax Examples

To better understand the AMT, let’s go over an example. Mary is a single person who earned $85,000 last year. Since her income is more than $73,600 but less than $199,900, her AMT rate is 26%. So she subtracts the $73,600 exemption amount from her $85,000 income and is left with $11,400. The AMT is 26% of $11,400, which comes to a tax bill of $2,964. Now she has to compare this amount to her regular federal income tax obligation to see if there’s a difference in the numbers. 

Are there any alternative minimum tax benefits?

One of the alternative minimum tax advantages is that you may be able to get a tax credit. If you paid the AMT in a previous year or years, but you’re not liable for the AMT in the current year, you might be eligible for a special minimum tax credit to use against your regular tax bill this year. Use IRS Form 8801, Credit for Prior Minimum Tax – Individuals, Estates, and Trusts to claim the credit. 

Summary

The alternative minimum tax definition is that it’s an additional tax for individuals who earn a certain amount of income. It closes the loophole so that taxpayers can’t significantly reduce their tax payments. 

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