Alternative Minimum Tax (AMT) and Net Investment Income Tax (NIIT)

Two additional taxes can significantly impact high-income taxpayers and those with certain types of income or deductions: the Alternative Minimum Tax (AMT) and the Net Investment Income Tax (NIIT). Understanding these taxes is essential for CFP professionals advising clients on tax-efficient strategies.

The Alternative Minimum Tax (AMT)

The AMT is a parallel tax system that runs alongside the regular income tax. It was originally designed to ensure that wealthy taxpayers with significant deductions still pay a minimum amount of tax. The taxpayer pays the higher of either the regular tax or the AMT.

AMT Calculation Formula

The AMT calculation follows this formula:

2025 AMT Exemption Amounts

The AMT exemption reduces AMTI before applying AMT rates. The exemption phases out for high-income taxpayers.

Phase-Out Rule: The AMT exemption is reduced by $0.25 for every $1.00 that AMTI exceeds the phase-out threshold. This means the exemption is completely eliminated at:

• Single: $626,350 + ($88,100 x 4) = $978,750
• MFJ: $1,252,700 + ($137,000 x 4) = $1,800,700

AMT Tax Rates (2025)

CFP Exam Tip: Unlike the regular tax with seven brackets, AMT has only two rates: 26% and 28%. Most AMT taxpayers are taxed at the 26% rate.

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AMT Adjustments vs. Preferences

Understanding the difference between adjustments and preferences is critical for the CFP exam:

AMT Adjustments (Can Add OR Subtract)

Adjustments can either increase or decrease AMTI depending on the item:

ISO Example: An employee exercises ISOs to buy stock worth $100,000 for an exercise price of $40,000. The $60,000 bargain element is added to AMTI in the year of exercise, even though there's no taxable event for regular tax purposes until sale.

AMT Preferences (Always ADD)

Preference items always increase AMTI:

CFP Exam Tip: The most commonly tested AMT items are:

1. State and local taxes (SALT) - ADD BACK
2. ISO bargain element - ADD at exercise
3. Private activity bond interest - ADD (preference)

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Net Investment Income Tax (NIIT)

The NIIT is a 3.8% surtax on net investment income for taxpayers with modified adjusted gross income (MAGI) above certain thresholds. It was enacted as part of the Affordable Care Act to help fund Medicare.

NIIT Calculation

The NIIT equals 3.8% of the lesser of:

1. Net Investment Income (NII), OR
2. Excess of MAGI over the threshold amount

2025 NIIT Thresholds

Critical Planning Note: Unlike most tax thresholds, the NIIT thresholds are NOT indexed for inflation. This means more taxpayers become subject to NIIT each year as incomes rise.

What Counts as Net Investment Income?

NIIT Calculation Example

Example: Sarah (single) has MAGI of $280,000, which includes $100,000 of net investment income.

Step 1: Calculate excess over threshold $280,000 - $200,000 = $80,000

Step 2: Determine the lesser amount

• Net Investment Income: $100,000
• Excess over threshold: $80,000
• Lesser amount: $80,000

Step 3: Calculate NIIT $80,000 x 3.8% = $3,040 NIIT

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Planning Strategies

AMT Planning Strategies

1. Defer ISO exercises - Spread ISO exercises across multiple years to avoid triggering AMT
2. Time SALT payments - Consider impact of property tax prepayment on AMT
3. Evaluate private activity bonds - May want to avoid if subject to AMT
4. Accelerate income - If in AMT, additional income may be taxed at only 26% vs. higher regular rates
5. Consider AMT credit - AMT paid due to timing differences (like ISOs) may generate credit for future years

NIIT Planning Strategies

1. Maximize retirement contributions - 401(k) and IRA contributions reduce MAGI
2. Convert passive to active - Material participation in rental activities may avoid NIIT
3. Tax-loss harvesting - Reduce capital gains to lower NII
4. Roth conversions - Future growth in Roth accounts avoids NIIT
5. Installment sales - Spread gain recognition over multiple years to stay below threshold
6. Qualified Opportunity Zone investments - May defer and reduce capital gains