For some taxpayers, the federal alternative minimum tax is an important planning consideration. This article provides an overview of how the AMT system works.
The alternative minimum tax (AMT) can increase the complexity of your tax planning. Knowing the basic rules can help you better plan for its potential impact.
How It Works
Originally introduced in the 1980s, the AMT system was designed to prevent higher income taxpayers from avoiding federal income taxes through the use of various exclusions, deductions, and credits. To achieve this goal, the AMT system treats certain items -- referred to as "preferences" and "adjustments" -- less favorably than they are treated for regular income tax purposes.
Affected items include interest on certain tax-exempt bonds; itemized deductions for home equity loan interest, state and local income taxes, and medical expenses; personal and dependency exemptions; incentive stock options; and depreciation.
Generally, the AMT calculation starts with your regular taxable income and requires you to make the required revisions for adjustments and preferences until you arrive at an alternative minimum taxable income (AMTI). Then, after an exemption amount is subtracted, a 26% tax rate is applied to the first $220,700 (in 2023) of the resulting income, and a 28% tax rate is applied to any amounts above $220,700.
The 2023 exemption amounts are $126,500 (married filing jointly), $81,300 (single and head of household), and $63,250 (married filing separately). These exemptions phase out at higher income levels.
Planning
If you believe you may have a potential AMT problem -- either this year or the next -- you may be able to use certain strategies to reduce your tax. For example, if a tax projection indicates that you will be subject to AMT this year but not next year, you may want to delay prepaying certain expenses, such as state and local income taxes, for which you would not receive a tax benefit this year.