What Is the Alternative Minimum Tax?

What we’ll cover:

• The AMT places a floor on high-income taxpayers’ tax liability, regardless of deductions or tax credits.
• Taxpayers subject to AMT calculate their tax liability twice.
• Some deductions, like state and local income taxes, aren’t allowed under the AMT.

Getting ready to prepare your federal tax return? Or are you just looking to sharpen your basic tax knowledge? Either way, it’s never a bad idea to review some of the key tax concepts that could be relevant to you during the filing season. 

On our docket for today is alternative minimum tax (AMT). 

If you’re already familiar with the ins and outs of the AMT, kudos! Because, if we’re being honest, this is not an easy (or the most fun) tax topic. 

For those not as familiar, though, a refresher course (or first-timer course) could be the perfect way to help you feel a little more ahead-of-the-game come tax season. 

So settle in with a fresh coffee (or whatever your preferred beverage-of-choice-while-talking-taxes is) and let’s dive in! 

What’s the purpose of the AMT?

It is possible for some taxpayers to significantly reduce, and even completely eliminate, their tax liability by claiming certain tax deductions and tax credits.

Enter the alternative minimum tax. It’s designed to ensure high-income taxpayers pay at least a minimum amount of federal income tax. AMT places a floor on what high-income taxpayers must pay in taxes by limiting certain tax breaks (like deductions) that would allow those high-income taxpayers to dramatically reduce their taxable income.

Who’s affected by the AMT?

Whether or not AMT affects you as a taxpayer depends on several factors, such as your filing status, your income (amount and type), and what deductions you’re claiming for the tax year. 

Generally speaking, the AMT usually affects high-income taxpayers. According to the Tax Policy Center, the AMT affected just 0.1% of all households in 2019, impacting those with income of $200,000 and higher. (See their breakdown here.)

The IRS has a worksheet that could help you determine whether you owe AMT (See Instructions for Form 1040 – Alternative Minimum Tax.) If you’re unsure, you can also check in with a tax professional.

So how is AMT calculated?

At a basic level, taxpayers who might be subject to AMT essentially have to calculate their tax liability twice – under the standard method (Form 1040) and under AMT. And then you pay whichever is higher. (Yup – you have to do more math and spend more time calculating just to pay the higher amount!)

Exact AMT calculations are best figured out by using a tax preparation software or consulting a tax professional, which is what we might suggest if you’re looking for specifics. (Everyone’s tax situation is different which is why we can’t give numbers here!) 

Calculating AMT on your own can be quite time consuming and more than a little confusing. If you’re still not convinced, check out IRS Form 6251, used to calculate AMT. Once you pull up that form, you’ll see 60 lines requiring their own calculations and figures that need to be entered. (Like we said – might be worth consulting a tax professional).

Some deductions aren’t allowed under the AMT

If you’re a high-income individual with a lot of expenses, you might itemize your deductions when you file your taxes as opposed to taking the standard deduction. (You can read up on the standard deduction vs. itemized here.)

However, when it comes to calculating your AMT, certain common deductions aren’t allowed. (Remember, you’ll have to calculate your tax liability twice with AMT.)

Deductions that you may lose under AMT include state and local income taxes, real estate taxes and personal property taxes (note that these deductions have been limited by the Tax Cuts and Jobs Act until 2026). That’s not an exhaustive list, but hopefully it gives you an idea of the deductions that you likely won’t be able to use to lower your taxable income for AMT purposes.

The bottom line

If you’re a middle-to high-income taxpayer, there’s a chance you might be subject to the AMT. It’s in place to ensure taxpayers pay at least a minimum amount of federal income tax. For those who are subject to AMT you’ll have to calculate your standard tax liability and your tax liability under AMT and pay whichever is higher.

As with many of the more complicated and/or time-consuming tax-filing responsibilities, it might be worth checking in with tax professional when it comes to AMT.