Alternative Minimum Tax

<div class="Section1">Items of tax preference which must be added to AMTI (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="778">778</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="780">780</a>) include: (1) the excess of depletion over the adjusted basis of property (except in the case of certain independent producers and royalty owners); (2) the excess of intangible drilling costs expensed (other than drilling costs of a nonproductive well) over the amount allowable for the year if the intangible drilling costs had been amortized over a 10-year period to the extent the excess is greater than 65 percent of the net income from oil, gas, and geothermal properties (with an exception for certain independent producers); (3) tax-exempt interest on specified private activity bonds (but reduced by any deduction not allowed in computing the regular tax if the deduction would have been allowable if the tax-exempt interest were includable in gross income) (ARRA 2009 provides that tax-exempt interest from private activity bonds issued during 2009 and 2010 is not a tax preference); (4) accelerated depreciation or amortization on certain property placed in service before 1987; and (5) seven percent of the amount excluded under IRC Section 1202 (gain on sales of certain small business stock).<a href="#_ftn1" name="_ftnref1">¹</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 57(a).<br /> <br /> </div></div><br />

<div class="Section1">Alternative minimum taxable income is taxable income, with adjustments made in the way certain items are treated for AMT purposes, and increased by any items of tax preference ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="781">781</a>).<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> Except as otherwise provided in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="779">779</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="782">782</a>, the provisions that apply in determining the regular taxable income of a taxpayer also generally apply in determining the AMTI of the taxpayer.<a href="#_ftn2" name="_ftnref2">²</a> In addition, references to a noncorporate taxpayer&rsquo;s adjusted gross income (AGI) or modified AGI in determining the amount of items of income, exclusion, or deduction must be treated as references to the taxpayer&rsquo;s AGI or modified AGI as determined for regular tax purposes.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 55(b)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect; 1.55-1(a).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect; 1.55-1(b).<br /> <br /> </div></div><br />

<div class="Section1">A taxpayer subject to the AMT in one year may be allowed a minimum tax credit against regular tax liability in subsequent years. The credit is equal to the total of the adjusted minimum taxes imposed in prior years reduced by the amount of minimum tax credits allowable in prior years. However, the amount of the credit cannot be greater than the excess of the taxpayer’s regular tax liability (reduced by certain credits such as certain business-related credits and certain investment credits) over the tentative minimum tax. The adjusted net minimum tax for any year is the AMT for that year reduced by the amount that would be the AMT if: (1) the only adjustments were those concerning the limitations on certain deductions (such as state taxes, certain itemized deductions, the standard deduction and personal exemptions (which were suspended from 2018-2025)); (2) the only preferences were those dealing with depletion, tax exempt interest, and small business stock; and (3) the limit on the foreign minimum tax credit did not apply. The adjusted net minimum tax is increased by the amount of any nonconventional fuel source credit and qualified electric vehicles credit that was not allowed for that year due to the AMT. For tax years after 2006 and before 2013, if an individual has minimum tax credits that have not been usable for three years, those long-term unused credits may be treated as a refundable credit.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 53.<br /> <br /> </div>

<div class="Section1">In addition to the tax calculated under the normal rates, it is sometimes necessary for a taxpayer to pay the <em>alternative minimum tax (AMT)</em>. The AMT is calculated by first determining the alternative minimum taxable income (AMTI, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="779">779</a>), reducing this amount by the allowable exemption to determine taxable excess, and then applying a two-tier tax rate schedule to the amount of the taxable excess.<div class="Section1"><br /> <br /> In 2025, the 28 percent rate applies to excess taxable income above $119,550 for married taxpayers filing separately and $239,100 for all other noncorporate taxpayers.<br /> <br /> In 2024, the 28 percent rate applies to excess taxable income above $116,300 for married taxpayers filing separately and $232,600 for all other noncorporate taxpayers.<br /> <br /> In 2023, the 28 percent rate applied to excess taxable income above $110,350 for married taxpayers filing separately and $220,700 for joint returns, individual returns, and estate and trusts.<br /> <br /> In 2022, the 28 percent rate applies to excess taxable income above $103,050 for married taxpayers filing separately and $206,100 for joint returns, individual returns, and estates and trusts.<a href="#_ftn1" name="_ftnref1">¹</a> The resulting amount is the taxpayer&rsquo;s tentative minimum tax. The preferential tax rates on certain capital gains held for more than 12 months and certain dividends are also used when determining the taxpayer&rsquo;s tentative minimum tax (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="702">702</a>).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> If the tentative minimum tax reduced by the AMT foreign tax credit exceeds the regularly calculated tax (with adjustments) for the tax year, the excess is the AMT. Regularly calculated tax for AMT purposes excludes certain taxes including: (1) the alternative minimum tax; (2) the tax on benefits paid from a qualified retirement plan in excess of the plan formula to a 5 percent owner; (3) the 10 percent penalty tax for certain premature distributions from annuity contracts; (4) the 10 percent additional tax on certain early distributions from qualified retirement plans; (5) the 10 percent additional tax for certain taxable distributions from modified endowment contracts; (6) taxes relating to the recapture of the federal subsidy from use of qualified mortgage bonds and mortgage credit certificates; (7) the additional tax on certain distributions from education IRAs; and (8) the 15 percent additional tax on medical savings account distributions not used for qualified medical expenses. Regularly calculated tax is reduced by the foreign tax credit, the Puerto Rico and possession tax credit, and the Puerto Rico economic activity credit.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> For tax years from 2000 through 2011, certain nonrefundable personal credits (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="758">758</a>) could be used to reduce the sum of a taxpayer&rsquo;s regular tax liability and AMT liability. The American Taxpayer Relief Act of 2012 (&ldquo;ATRA&rdquo;) made the use of nonrefundable personal credits against the AMT permanent.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2024-40.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&sect; 55(a), 55(b).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&sect; 55(c)(1), 26(b).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect; 26(a), as amended by TEAMTRA 2008 and ARRA 2009.<br /> <br /> </div></div><br />

<div class="Section1"><em>Editor&rsquo;s Note</em>: The 2017 tax reform legislation temporarily increased the AMT exemption amount to $109,400 for married taxpayers filing joint returns (half this amount if separate returns are filed) and $70,300 for all other taxpayers (other than estates and trusts, where the exemption is $24,600).<div class="Section1"><br /> <br /> For 2025 (projected), the AMT exemption amounts are: $137,000 for married taxpayers filing joint returns (half this amount if separate returns are filed) and $88,100 for all other taxpayers (other than estates and trusts, where the exemption is $30,700).<br /> <br /> For 2024, the AMT exemption amounts are: $133,300 for married taxpayers filing joint returns (half this amount if separate returns are filed) and $85,700 for all other taxpayers (other than estates and trusts, where the exemption is $29,900).<br /> <br /> The applicable phaseout thresholds are $1,252,700 for married filing jointly and $626,350 for all other taxpayers in 2025 (projected) and $1,218,700 for married filing jointly and $609,350 for all other taxpayers in 2024.<br /> <br /> While the Act itself provided that the $500,000 limit would apply for taxpayers <em>other than estates or trusts,</em> the IRS released Revenue Procedure 2018-57, which provided that the limit for estates and trusts is $99,700 in 2024 and projected to be $102,450 in 2025.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> ATRA permanently &ldquo;patched&rdquo; the AMT exemption amount, and applies retroactively to 2012 and all tax years thereafter. Because the AMT was originally intended to apply only to higher income taxpayers who are able to avoid taxation through the use of tax preferences, only taxpayers with income levels above a certain threshold amount are required to calculate their AMT tax liability. Prior to enactment of ATRA, Congress passed legislation each year to retroactively &ldquo;patch&rdquo; the AMT exemption amount for the prior tax year so that millions of lower income taxpayers would not become subject to the AMT. ATRA includes an inflation adjustment provision so that the exemption amount will be increased annually for inflation for all tax years beginning after 2012.<br /> <br /> In 2018-2025, these exemption amounts are reduced by 25 percent of the amount by which the AMTI exceeds $1 million ($1,252,700 in 2025 (projected), $1,218,700 in 2024, $1,156,300 in 2023, $1,079,800 in 2022 and $1,047,200 in 2021) on a joint return and $500,000 ($626,350 in 2025 (projected), $609,350 in 2024, $578,100 in 2023, $539,900 in 2022 and $523,600 in 2021) for all other filers.<a href="#_ftn2" name="_ftnref2">²</a> In 2017, these threshold levels were $160,900 on a joint return, $120,700 on a single return and $80,450 on a separate return filed by a married taxpayer, or in the case of an estate or trust.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> For children subject to the &ldquo;kiddie tax&rdquo; ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="679">679</a>) the exemption is the lesser of the above amounts or the child&rsquo;s earned income plus&nbsp; $9,550 in 2025 (projected) (up from $9,250 in 2024, $8,800 in 2023, $8,200 in 2022, $7,950 in 2021, $7,900 in 2020, and $7,750 in 2019).<a href="#_ftn4" name="_ftnref4">⁴</a> For tax years beginning in 2020, the unearned income of minors will no longer be subject to trusts and estates tax rates. Pre-reform rules will again apply.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Pub. Law. 115-97, IRC &sect; 55(d)(4), Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2024-40.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Rev. Proc. 2020-45.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect; 55(d), as amended by TEAMTRA 2008, ARRA 2009, and ATRA.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect; 59(j); Rev. Proc. 2018-18, Rev. Proc. 2018-57, Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2024-40.<br /> <br /> </div></div><br />

<div class="Section1"><em>Editor&rsquo;s Note</em>: The mortgage interest deduction was limited to $750,000 under the 2017 tax reform legislation. Further, the personal exemption was suspended from 2018 through 2025, as was the limit on itemized deductions for high-income taxpayers.<div class="Section1"><br /> <br /> In general, the following adjustments are made to taxable income in computing alternative minimum taxable income (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="778">778</a>, generally): (1) generally, property must be depreciated using a less accelerated method or the straight line method over a period which is longer than that used for regular tax purposes, except that a longer period is not required for property placed in service after 1998; (2) the AMT net operating loss is deductible only up to 90 percent of AMTI determined without regard to such net operating loss; (3) no deduction is allowed for miscellaneous itemized deductions; (4) generally, no deduction is allowed for state and local taxes unless attributable to a trade or business, or property held for the production of income (recovery of state tax disallowed for AMT purposes in a previous year is not added to AMTI in the year recovered); (5) medical expenses are allowed as a deduction only to the extent such expenses exceed 7.5 percent of adjusted gross income; (6) interest on indebtedness secured by a primary or second residence is generally deductible (within dollar limitations) if incurred in acquiring, constructing, or substantially improving the residence; however, the amount of refinanced indebtedness with regard to which interest is deductible is limited to the amount of indebtedness immediately prior to refinancing; (7) no standard deduction is allowed; (8) no deduction for personal exemptions is allowed; (9) the limitation on itemized deductions for upper-income taxpayers does not apply; (10) the taxpayer will include any amount realized due to a transfer of stock pursuant to the exercise of an incentive stock option; (11) AMTI is determined using losses from any tax shelter farm activity (determined by taking into account the AMTI adjustments and tax preferences) only to the extent that the taxpayer is insolvent or when the tax shelter farm activity is disposed of; and (12) passive activity losses (determined by taking into account the adjustments to AMTI and tax preferences) are not allowed in determining AMTI except to the extent that the taxpayer is insolvent.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&sect; 56, 58.<br /> <br /> </div></div><br />