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!
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.
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.
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).
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.
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.
This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.