Alternative Minimum Tax (AMT)

The Alternative Minimum Tax is one of the most complex areas of individual taxation. While the Tax Cuts and Jobs Act (TCJA) significantly reduced the number of taxpayers subject to AMT, understanding how it works remains essential for EA exam success and professional practice.

What Is the AMT?

The Alternative Minimum Tax is a parallel tax system that operates alongside the regular income tax. Its purpose is to ensure that taxpayers who benefit from certain tax preferences—such as large itemized deductions or favorable treatment of certain income types—still pay a minimum level of tax.

How it works: Taxpayers must calculate their tax liability two ways:

1. Under the regular income tax rules
2. Under the AMT rules (which disallow certain deductions and preferences)

If the AMT calculation produces a higher tax than the regular tax, the taxpayer pays the difference as AMT (in addition to regular tax).

Why Does AMT Exist?

Congress created AMT in 1969 after learning that 155 high-income individuals paid zero federal income tax by using legal deductions and exclusions. The AMT was designed as a "catch" to ensure these taxpayers couldn't completely avoid tax liability.

Over time, AMT expanded to affect many middle-income taxpayers, particularly those in high-tax states with large SALT deductions. TCJA addressed this by dramatically increasing AMT exemptions starting in 2018.

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2024 AMT Exemption Amounts

The AMT exemption is the amount of Alternative Minimum Taxable Income (AMTI) that is not subject to AMT. For 2024:

EA Exam Tip: MFS taxpayers get exactly half the MFJ exemption. Single and HOH taxpayers get the same exemption amount.

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AMT Exemption Phase-Out

The AMT exemption is not available to all high-income taxpayers. It phases out (is reduced) when AMTI exceeds certain thresholds.

2024 Phase-Out Thresholds:

Phase-out calculation: The exemption is reduced by 25 cents for every dollar of AMTI above the threshold.

Example: A single taxpayer with AMTI of $700,000 exceeds the threshold by $90,650 ($700,000 - $609,350). Their exemption is reduced by $22,662.50 ($90,650 x 25%), leaving an exemption of $63,037.50 ($85,700 - $22,662.50).

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AMT Tax Rates

Unlike the regular tax system with seven brackets, AMT uses only two rates for 2024:

Calculation shortcut: If AMTI exceeds the 28% threshold, multiply the entire amount by 28% and subtract $4,652 ($2,326 if MFS).

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Common AMT Preference Items and Adjustments

The key to AMT is understanding which deductions and income items are treated differently. When calculating AMTI, taxpayers must "add back" certain items that reduced regular taxable income.

Major AMT Add-Backs:

Incentive Stock Options (ISOs) - Important for EA Exam:

When an employee exercises an ISO, there is no regular tax consequence if they hold the stock. However, for AMT purposes, the "bargain element" (fair market value at exercise minus exercise price) is included in AMTI.

Example: An employee exercises ISOs to buy 1,000 shares at $10/share when the stock is worth $50/share. The bargain element is $40,000 (1,000 x $40). This $40,000 is added to AMTI in the year of exercise, even though there's no regular tax until the stock is sold.

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Calculating Alternative Minimum Taxable Income (AMTI)

The AMTI calculation starts with regular taxable income and makes adjustments:

AMTI Formula:

Regular Taxable Income

• Standard Deduction (if claimed)
• SALT Deduction (from Schedule A)
• Private Activity Bond Interest
• ISO Bargain Element
• Depreciation Adjustment
• Other AMT Preference Items

• AMT-Specific Deductions = Alternative Minimum Taxable Income (AMTI)

Then:

AMTI

• AMT Exemption (reduced if AMTI exceeds phase-out threshold) = Taxable Excess x 26% or 28% rate = Tentative Minimum Tax

If Tentative Minimum Tax > Regular Tax, pay the difference as AMT.

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Form 6251 Overview

Form 6251, Alternative Minimum Tax—Individuals is used to calculate AMT. The form has three main parts:

Part I: Alternative Minimum Taxable Income

• Line 1: Taxable income from Form 1040
• Lines 2a-2t: AMT adjustments (add-backs and subtractions)
• Line 3: Other adjustments
• Line 4: Alternative Minimum Taxable Income (AMTI)

Part II: Alternative Minimum Tax

• Line 5: AMT exemption amount
• Line 6: Taxable excess (AMTI minus exemption)
• Line 7: Tentative minimum tax (Line 6 x 26%/28%)
• Line 9: Regular tax liability
• Line 10: AMT (excess of tentative minimum tax over regular tax)

Part III: Tax Computation Using Maximum Capital Gains Rates

• Used when taxpayer has capital gains or qualified dividends
• Ensures favorable capital gains rates apply to AMT as well

Who must file Form 6251?

• Anyone whose tentative minimum tax exceeds regular tax
• Anyone who claims certain credits (like foreign tax credit) that require AMT calculation
• IRS instructions provide a flowchart to determine filing requirement

AMT is reported on Schedule 2, Line 1 of Form 1040 and flows to Form 1040, Line 17.

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How TCJA Reduced AMT Impact

The Tax Cuts and Jobs Act of 2017 made significant changes effective 2018-2025:

Higher Exemptions: TCJA nearly doubled AMT exemption amounts. Pre-TCJA (2017), the MFJ exemption was only $84,500; for 2024, it's $133,300.

Higher Phase-Out Thresholds: Pre-TCJA, phase-out began at $160,900 for MFJ. Now it begins at $1,218,700—meaning far fewer taxpayers lose their exemption.

SALT Cap Reduces AMT Triggers: TCJA limited SALT deductions to $10,000 for regular tax purposes. Since SALT was a major AMT trigger, this cap means fewer taxpayers have significant AMT add-backs.

Result: The number of taxpayers subject to AMT dropped from approximately 5 million pre-TCJA to under 200,000 in recent years.

Important: These TCJA provisions are scheduled to expire after 2025. If Congress doesn't act, AMT exemptions will return to much lower pre-TCJA levels (with inflation adjustments), and millions more taxpayers could again face AMT.

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EA Exam Tips for AMT

1. Know the exemption amounts for all filing statuses—especially that MFS is exactly half of MFJ
2. Memorize the phase-out rate: 25 cents per dollar above the threshold
3. Remember the two rates: 26% up to $232,600, then 28%
4. ISOs are an exam favorite: The bargain element creates AMT income even with no regular tax
5. SALT is fully added back for AMT—this is the most common adjustment
6. Form 6251 is reported on Schedule 2, Line 1 of Form 1040