Alternative Minimum Tax

<div class="Section1"><br /> <br /> Several refundable tax credits, such as the earned income credit and the refundable portion of the child tax credit, are allowed as an offset against AMT liability. Other personal nonrefundable credits also allowed as an offset include:<br /> <blockquote>Adoption tax credit<br /> <br /> Child and dependent care credit<br /> <br /> Nonrefundable portion of the child tax credit<br /> <br /> Certain learning credits<br /> <br /> Tax credit for IRAs and retirement plans<br /> <br /> Energy saving credits<a href="#_ftn1" name="_ftnref1">¹</a></blockquote><br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 26(a)(2).<br /> <br /> </div>

<div class="Section1">An individual who has annual net earnings from self-employment of $400 or more is subject to self-employment tax.<a href="#_ftn1" name="_ftnref1">¹</a> Generally, sole proprietors, single member LLCs treated as a disregarded entity and general partners are considered to be self-employed. Self-employment tax is reported on Schedule SE attached to Form 1040. However, a self-employed taxpayer is entitled to an above-the-line deduction equal to one-half of the self-employment tax paid.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="Section1"><br /> <br /> In essence, self-employment tax is the combination of Social Security tax and Medicare tax. The Social Security tax rate is 12.4 percent and the Medicare tax rate is 2.9 percent.<a href="#_ftn3" name="_ftnref3">³</a> For 2025, Social Security taxes apply only to the first $176,100 of self-employment income. If the taxpayer has both wages and self-employment income, the amount of self-employment income subject to the Social Security tax is the difference between the cap amount and the amount of the taxpayer’s wages.<br /> <blockquote><em>Example:</em> In 2025, Asher has wages of $100,000. In addition, Asher has self-employment income of $90,000. Since the Social Security wage base is $176,100, only $13,900 of Asher’s $90,000 of self-employment is subject to Social Security tax.</blockquote><br /> On the other hand, in regard to Medicare tax, there is no cap on the amount of self-employment income that is subject to the tax. Also, for self-employed individuals with income that exceeds certain threshold amounts, an additional Medicare tax of 0.9 percent may be added to the base 2.9 percent Medicare rate, for a total tax of 3.8 percent. The additional tax applies for self-employed individuals with income in excess of $250,000 for joint filers, $125,000 for married taxpayers filing separately and $200,000 for all other taxpayers.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 6017.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 164(f).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 1401.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  IRC § 1401(b)(2).<br /> <br /> </div>

<div class="Section1">If a child is subject to the kiddie tax (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8601">8601</a>), it is possible that he or she may be subject to AMT. Under special rules, the AMT exemption of a child subject to the kiddie tax in 2025 is the lesser of the AMT exemption for a single taxpayer ($88,100) or the total of the child&rsquo;s earned income plus $9,550.<a href="#_ftn1" name="_ftnref1">¹</a><div class="refs"><br /> <br /> &nbsp;<br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 59(j); Pub. Law No. 115-97, Notice 2024-40.<br /> <br /> </div></div><br />

<div class="Section1"><em>Editor&rsquo;s Note:</em>&nbsp;The 2017 tax reform legislation temporarily increased the AMT exemption amount for tax years beginning after December&nbsp;31, 2017 and before December&nbsp;31, 2026.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> In addition to regular income tax, the <em>alternative minimum tax</em> (AMT) is an additional tax that certain taxpayers must pay. In theory, the purpose of AMT is to prevent high income taxpayers from taking advantage of tax benefits (such as exclusions, deductions and credits) to substantially reduce or even eliminate their tax liability. However, in reality, due to complex rules, many relatively low income taxpayers may become subject to AMT.<br /> <br /> The AMT is calculated as follows:<br /> <blockquote>(1)&nbsp; compute alternative minimum taxable income (AMTI, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8576">8576</a>);<br /> <br /> (2)&nbsp; subtract the exemption amount from AMTI; and<br /> <br /> (3)&nbsp; multiply the remaining AMTI (step (2), above), by the applicable AMT rate.</blockquote><br /> For purposes of sheltering lower income taxpayers from being subject to AMT, the Code exempts certain amounts of income. Only AMTI in excess of the exemption amount is subject to AMT. The 2025 exemption amounts are as follows:<a href="#_ftn2" name="_ftnref2">²</a><br /> <table border="1" align="center"><br /> <tbody><br /> <tr><br /> <td style="text-align: center;" width="305"><strong>Filing Status</strong></td><br /> <td style="text-align: center;" width="230"><strong>AMT Exemption</strong></td><br /> </tr><br /> <tr><br /> <td width="305">Married filing jointly or qualifying widow(er)</td><br /> <td style="text-align: center;" width="230">$137,000</td><br /> </tr><br /> <tr><br /> <td width="305">Married filing separately</td><br /> <td style="text-align: center;" width="230">$68,500</td><br /> </tr><br /> <tr><br /> <td width="305">Single or Head of Household</td><br /> <td style="text-align: center;" width="230">$88,100</td><br /> </tr><br /> <tr><br /> <td width="305">Estates and&nbsp;Trusts</td><br /> <td style="text-align: center;" width="230">$30,700</td><br /> </tr><br /> </tbody><br /> </table><br /> A 28 percent AMT rate applies to excess taxable income. In 2025, the 28 percent rate applies to excess taxable income above $119,550 for married taxpayers filing separately and $239,100 for joint returns, individual returns and estates and trusts.&nbsp;In 2024, the 28 percent rate applies to excess taxable income above $116,300 for married taxpayers filing separately and $232,600 for joint returns, individual returns and estates and trusts. 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 estates and trusts. In 2022, the amounts were $103,050 for married taxpayers filing separately and $206,100 for joint returns, individual returns and estates and trusts.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> For purposes of computing AMT, the taxpayer is allowed to take the foreign tax credit and certain other credits (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8573">8573</a>).<a href="#_ftn4" name="_ftnref4">⁴</a> After computing AMT, the AMT amount is compared with the taxpayer&rsquo;s regular income tax liability. If the regular tax is lower than AMT, the difference is AMT that is owing in addition to the tax. Stated differently, the taxpayer must pay the higher of the AMT or the regular tax.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <blockquote><em>Example:</em> For 2025, Asher&rsquo;s regular income tax liability is $75,000 but his AMT tax liability is $95,000, or $20,000 more than his regular income tax liability. Asher&rsquo;s liability is $95,000 ($75,000 regular income tax and $20,000 AMT).</blockquote><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;&nbsp;55(d)(4).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;55(d)(1), Pub. Law No.&nbsp;115-97.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2024-40.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&nbsp;55(b)(1)(A), Pub. Law No.&nbsp;115-97, Rev. Proc. 2018-57.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect;&nbsp;55(a).<br /> <br /> </div></div><br />

<div class="Section1">Alternative minimum taxable income (AMTI) is taxable income, with adjustments made in the way certain items are treated for AMT purposes, increased by tax preference items.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> Except as otherwise provided below and in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8577">8577</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8578">8578</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 non-corporate 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 /> The following chart is a non-exclusive comparison of the different treatment of certain items in the computation of regular income tax as compared to the computation of AMT:<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <table border="1" align="center"><br /> <thead><br /> <tr><br /> <td style="text-align: center;" valign="top" width="184"><strong>Item</strong></td><br /> <td style="text-align: center;" valign="top" width="165"><strong>Regular Income&nbsp;Tax Computation</strong></td><br /> <td style="text-align: center;" valign="top" width="191"><strong>AMT Computation</strong></td><br /> </tr><br /> </thead><br /> <tbody><br /> <tr><br /> <td valign="top" width="184">Standard deduction (taxpayer does not itemize)</td><br /> <td valign="top" width="165">Allowed</td><br /> <td valign="top" width="191">Not allowed</td><br /> </tr><br /> <tr><br /> <td valign="top" width="184">Phase out of itemized deductions (N/A for 2018-2025)</td><br /> <td valign="top" width="165">Phased out if AGI exceeds applicable thresholds</td><br /> <td valign="top" width="191">No phase out</td><br /> </tr><br /> <tr><br /> <td valign="top" width="184">Medical Expenses</td><br /> <td valign="top" width="165">Allowed as itemized deductions to the extent they exceed 7.5% of AGI</td><br /> <td valign="top" width="191">Same</td><br /> </tr><br /> <tr><br /> <td valign="top" width="184">Taxes</td><br /> <td valign="top" width="165">State income taxes, property taxes, etc. allowed as itemized deductions (subject to $10,000 cap in 2018-2025)</td><br /> <td valign="top" width="191">Not allowed</td><br /> </tr><br /> <tr><br /> <td valign="top" width="184">Home Mortgage Interest</td><br /> <td valign="top" width="165">Allowed (subject to limitations)</td><br /> <td valign="top" width="191">Allows only acquisition indebtedness including loans taken to improve principal residence or second home. Interest attributed to refinanced amounts in excess of original loan not allowed.</td><br /> </tr><br /> <tr><br /> <td valign="top" width="184">State&nbsp;Tax Refund</td><br /> <td valign="top" width="165">Included in gross income if previously deducted as itemized deduction</td><br /> <td valign="top" width="191">Since state taxes are not allowed as a deduction, refunds are not included in income. Amount of regular income entered as a negative amount.</td><br /> </tr><br /> <tr><br /> <td valign="top" width="184">Interest expense related to tax-exempt interest income</td><br /> <td valign="top" width="165">Not allowed</td><br /> <td valign="top" width="191">Allowed if interest expense is related to tax-exempt private activity bonds</td><br /> </tr><br /> <tr><br /> <td valign="top" width="184">Miscellaneous itemized deductions (N/A for 2018-2025)</td><br /> <td valign="top" width="165">Allowed to the extent they exceed 2% of AGI assuming the taxpayer itemizes</td><br /> <td valign="top" width="191">Not allowed</td><br /> </tr><br /> <tr><br /> <td valign="top" width="184">Qualified stock options</td><br /> <td valign="top" width="165">Exercise of a qualified stock option not taxable</td><br /> <td valign="top" width="191">Difference between amount paid to acquire the stock and the FMV of the stock is included as AMTI income</td><br /> </tr><br /> <tr><br /> <td valign="top" width="184">Tax-exempt income</td><br /> <td valign="top" width="165">Not included in gross income</td><br /> <td valign="top" width="191">Included in AMTI income</td><br /> </tr><br /> </tbody><br /> </table><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;&nbsp;55(b)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.55-1(a).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.55-1(b).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&sect;&nbsp;56, 58.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> <em>Editor’s Note:</em> The 2017 tax reform legislation temporarily increased the AMT exemption amount for tax years beginning after December 31, 2017 and before December 31, 2025. For 2025, the amount increased to $137,000 for married taxpayers filing joint returns (half this amount for separate returns, $68,500) and $88,100 for all other taxpayers. For 2024, the amount was $133,300 for married taxpayers filing joint returns (half this amount for separate returns, $66,650) and $85,700 for all other taxpayers.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> The purpose of the AMT exemption is to prevent its imposition on lower income taxpayers. However, the AMT exemption does phase out when AMTI reaches certain threshold levels.<a href="#_ftn2" name="_ftnref2">²</a> The phase out is a reduction of the exemption by 25 percent of each dollar over the applicable threshold. The following chart sets forth the applicable 2025 AMTI thresholds as well as the total phase out amount, which were also increased by the 2017 tax reform legislation.<br /> <table border="1" align="center"><br /> <tbody><br /> <tr><br /> <td style="text-align: center;" width="292"><strong>Filing Status</strong></td><br /> <td style="text-align: center;" width="248"><strong>AMTI Exemption Phase Out Threshold Amount</strong></td><br /> </tr><br /> <tr><br /> <td width="292">Married filing jointly</td><br /> <td style="text-align: center;" width="248">$1,252,700</td><br /> </tr><br /> <tr><br /> <td width="292">All other taxpayers (other than trusts and estates)</td><br /> <td style="text-align: center;" width="248">$626,350</td><br /> </tr><br /> <tr><br /> <td width="292">Trusts and Estates</td><br /> <td style="text-align: center;" width="248">$102,450</td><br /> </tr><br /> </tbody><br /> </table><br /> <blockquote><em>Example:</em> In 2025, Asher and Ashley, a married couple, have AMTI of $1,300,000. Their AMT exemption without considering the phase out is $137,000. However, the couple’s AMTI is $1,300,000 and the AMTI exemption phase out threshold amount is $1,252,700. As a result, their AMT exceeds the threshold amount by $47,300. Applying the phase out, the couple’s 2025 exemption amount is reduced from $137,000 to $11,825 (25% * $47,300).</blockquote><br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 55(d)(4); Rev. Proc. 2023-34, Rev. Proc. 2024-40.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 55(d)(3).<br /> <br /> </div>

<div class="Section1"><br /> <br /> Yes. There are two factors that contribute to the imposition of AMT. There are “exclusion items” and “deferral items.” Examples of an exclusion item include miscellaneous itemized deductions and state or local taxes that are deductible for regular income tax purposes, but never for AMT purposes. For this reason, there is never a credit for an exclusion item.<br /> <br /> For AMT purposes, a deferral item is simply a matter of a timing difference. For example, certain property depreciated using the accelerated depreciation method must be depreciated under the straight line method for AMT purposes. Thus, for regular income tax purposes, depreciation amounts in the early years of property depreciated under the accelerated method will be higher than under the straight line method. For that reason, it will cause AMTI to be higher than regular taxable income. However, in later years, depreciation amounts for property depreciated under the accelerated method will be lower than depreciation amounts calculated using straight line depreciation.<br /> <br /> Therefore, in the absence of an AMT credit for a deferral item, the taxpayer would be subject to double negative tax consequences with respect to one item.<br /> <blockquote><em>Example:</em> In 2024, Asher is subject to AMT. Although for regular income tax purposes, based on the accelerated depreciation method, Asher is entitled to a $2,500 depreciation deduction, for AMT purposes the straight line depreciation deduction is $1,750. As a result, Asher’s depreciation deduction is the lesser $1,750 amount.<br /> <br /> In 2025, Asher is not subject to AMT. However, based on the accelerated depreciation method, his regular income tax depreciation deduction is $1,500 (it would have been $1,750 if depreciated under the straight line method).<br /> <br /> So, in the AMT year, Asher was not allowed to take the higher accelerated depreciation deduction. Later, in the non-AMT year, Asher was compelled to take the lower accelerated depreciation deduction.</blockquote><br /> Fortunately, there is an AMT credit to allow an adjustment in the non-AMT year. Using Form 8801, the AMT from the prior year is recalculated based on what it would have been but for the deferral item.<a href="#_ftn1" name="_ftnref1">¹</a> So in the above example, Asher’s AMT would be refigured using the accelerated depreciation deduction. The difference between the actual AMT tax and the recomputed AMT tax is called the AMT credit. Although the AMT credit is nonrefundable, it is cumulative, so it can be carried forward to subsequent tax years until it is fully used.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </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(d).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 53(b).<br /> <br /> </div>