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21 October, 2022

Alternative Minimum Tax – Take a Second Look

As a small business owner, you no doubt feel the burden of your taxes are too high. Your tax liability takes away from the profit margin you heavily rely on to keep your company viable and competitive. So, when you hear about the alternative minimum tax, your mind probably goes blank in disbelief to learn your business may be subject to paying more taxes.

However, on the positive side, maybe the alternative minimum tax (AMT) will give you an alternative to paying high taxes.

What the AMT does is actually make for a fairer tax system by ensuring wealthy taxpayers pay their fair share. More on that next…

Why the AMT Came into Existence 

The AMT came into existence for the following reason: 

The U.S. Treasury Secretary Joseph Barr told Congress in the mid-1960s a total of155 high-income households did not pay any federal income taxes in 1966. U.S. taxpayers were incensed, which paved the way for the AMT to be created into law in 1969. 

The AMT was designed to prevent taxpayers from using tax law loopholes to avoid paying their fair share of taxes. The ultimate goal of the AMT is to ensure every taxpayer pays a minimum amount of tax.

History of the AMT

The most recent changes to the AMT took place in 2017 with the Tax Cuts and Jobs Act (TCJA). Beginning in 2018, the TCJA significantly increased AMT exemptions and exemption phaseout thresholds. 

For example, the phaseout threshold for a single filer jumped from $120,700 in 2017 to $500,000 in 2018. This change, and additional changes made by the TCJA, will be in place temporarily through 2025. These changes worked to greatly reduce the number of taxpayers who pay the AMT. 

The number of taxpayers who paid AMT decreased from more than 5 million in 2017 to just below 250,000 in 2018. 

How the AMT is Calculated 

The AMT begins with regular taxable income, and it applies its own system of “adjustments” and “preferences.” Those calculations add more income to or remove deductions from regular taxable income. This variable brings about the need for the alternative minimum taxable income, or the (AMTI). 

It is worth noting that the AMT does cause people to lose certain tax breaks. 

Next, an AMT exemption is subtracted, and AMT tax rates are applied to get to the tentative minimum tax. 

For the AMT parallel tax system, you need to take the following actions: 

1)     Complete the regular tax return 

2)     Complete AMT Form 6251 

3)     Compare the two taxes 

4)     Pay the higher of the two taxes 

AMT Exemptions 

Once you have added or subtracted adjustments and preference items, you will be left with AMTI. Afterward, you apply for the AMT exemption. The AMTI and your filing status will determine your exemption amount. 

Exemption amounts for 2020 were the following: 

  • Married filing jointly or qualified widow(er) – $113,400
  • Single or head of household – $72,900
  • Married filing separately – $56,700

For 2020, the exemption amounts were phased out at the rate of 25 cents for each $1 of AMT income more than: 

  •   Married filing jointly or qualified widow (er) – $1,036,800
  •   Single or head of household – $518,400
  •   Married filing separately – $518,400

Once you have subtracted the exemption amount from the AMTI, the remaining income will be subject to the AMT rate. The AMT rate is a flat 26 percent for income up to $197,900 ($98,950 for married taxpayers filing separate returns). 

Income greater than those amounts is taxed at a 28 percent rate. Keep in mind, special calculations apply to capital gains. 

Because of the exemption and phaseout threshold rises, fewer taxpayers end up paying AMT nowadays. This increase is the case even if some of the preference or adjustment items apply to them. 

As a result of another tax law change – the 2019 “SECURE” Act, children use the same AMT exemption as other taxpayers. Prior to this change, the exemption amount was substantially lower than the regular exemption.

As an example, the exemption in 2017 was $7,500. That reality translated into children with investment income often paying AMT in addition to regular tax. Children who pay kiddie tax on investment income are much less likely to pay AMT. 

This change is in effect through 2025. 

What Are the Chances the AMT Will Affect You? 

Before the passage of the TCJA (tax years 2017 and earlier) if your household annual income was more than $200,000, you had a 56 percent chance \the AMT would show up on your tax return.

Today, your chances of encountering the AMT are significantly lower, mainly due to two major changes within the TCJA. They are: 

Ø  An increase in the AMT exemptions 

Ø  An increase in the phase-out thresholds 

Look to Drilldown Solution for Expert Tax Planning Services

Drilldown Solution delivers a seamless tax planning and compliance process.  As is the case with all of our programs, tax planning solutions are custom-made based on an individual’s needs, wants, and the goals of your business. You can expect your business to greatly benefit from our dedicated team of tax experts, ensuring your tax planning needs are met quickly and efficiently. 

Our Provo, Utah Tax Planning Services are just what your small business needs.


Note: The material and contents provided in this article are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

Ed Gabriel, CPA is President of DrillDown Solution and a graduate of Brigham Young University. His clients benefit from over 40 years of experience in maximizing profits, minimizing taxes and putting them in the best financial position possible.