What is AMT & Why Do I Have to
Let’s face it, Congress, like most of us, has a budget
to work with. A large part of their budget comes from
federal income taxes. The federal income tax system is
meant to be fair and progressive. Those who can pay
There are things we can do to reduce our income tax
bill. Itemized deductions are used by many of us to
reduce taxable income, thereby reducing tax. To make
sure everyone is paying a fair amount of income tax, and
not reducing their tax bill too low, an “alternate” system
called alternative minimum tax (AMT) was created.
If your regular tax is higher than what is calculated under
the AMT system, you do not owe AMT. However, if
your regular tax is less than what is calculated under the
AMT system, you will find an additional tax calculated
under the “alternate” system. Form 6251, Alternative
Minimum Tax - Individuals, is used to calculate AMT.
First let’s review how the regular tax system works
before we look into the details of the alternate system.
Regular Tax System Rates
The regular tax system has progressive rates, meaning
those who can pay more, because of higher earnings,
will pay more. The table below shows each of the tax
rates and at what level of taxable income the next rate
is used. However, the more you make, the higher your
tax rate. You do not lose the benefit of the lower
rates. Once your income moves into the next rate, that
portion of your income will be taxed based at that rate.
2010 Regular Tax Rates
Rate S MFJ , QW MFS HH
10% $0 $0 $0 $0
15% $8,376 $16,751 $8,376 $11,951
25% $34,001 $68,001 $34,001 $45,551
28% $82,401 $137,301 $68,651 $117,651
33% $171,851 $209,251 $104,626 $190,551
35% $373,651 $373,651 186,626 $373,651
S= Single. MFJ =Married Filing Joint. QW=Qualified
Widow(er). MFS=Married Filing Separate. HH=Head
For example, a couple who files married filing joint
(MFJ), has taxable income of $75,000. Their first
$16,750 of taxable income is taxed at the 10% tax rate,
the next $51,250 is taxed at the 15% rate, and the last
$7,000 is taxed at the 25% rate. The total tax is $11,113
under the regular tax system.
Now that you have an overview of how the regular tax
system works, we can look at the “alternative” system, AMT.
AMT System Rates
The AMT rates are 26% and 28%. To determine how
much income is subject to AMT, alternative minimum
taxable income is calculated by adding back certain
items that are allowed to reduce taxable income under
the regular tax system but are not allowed for AMT.
Once alternative minimum taxable income is
determined, an exemption amount may further reduce
that income subject to the 26% and 28% AMT rates.
Children are also subject to the AMT. In 2010, for a
child subject to kiddie tax, the AMT exemption amount
cannot exceed the sum of the child’s earned income plus
$6,700, but no higher than the AMT exemption amount
for a Single filer.
Not all taxpayers receive a benefit for
the exemption amount because the AMT
exemption is reduced by 25% of the amount by
which the alternative minimum taxable income exceeds
the beginning phase-out amount and completely phasedout
when your income reaches that ending phase-out.
Your tax professional will know the exemption amount
and phase-out range for your filing status.
If your regular tax is greater than the AMT, you are not
subject to AMT. However, if the AMT is higher than
the regular tax, you must pay the AMT amount with
your Form 1040.
For example: the couple we looked at earlier with taxable
income under the regular tax system was $75,000 and the
total tax was $11,113. However, when considering the
AMT, there are a number of items they need to add back
because they are not allowed for AMT purposes. The
couple’s AMT is calculated as $14,323. Therefore, on the
couple’s Form 1040, they will have an additional tax of
$3,210. If however, their AMT was $11,113 or less, there
would be no additional tax because AMT would be equal
to or less than the regular tax.
Is There Any Hope?
It may have come as a shock to find out you now have
to pay more because of the AMT system. Does this
mean that all tax planning is a lost cause now that you are
subject to the AMT system? Absolutely not.
Several popular itemized deductions are still allowed
regardless of AMT:
• Charitable contributions.
• Property taxes.
• Mortgage interest on acquisition costs, home
improvements, and construction of a home as well
as a second home. The second home is defined less
liberally for AMT purposes; for example it does not
include a boat or motorhome.
• Medical expenses that exceed 10% of your adjusted
• Casualty losses.
These items may lower both regular and AMT taxes:
• Capital gain rates.
• Business losses.
• Items that reduce adjusted gross income, such as
deductible IRA contributions, deductible moving
expenses, student loan interest, qualified educator
Unfortunately, these common items do not provide
benefits within the AMT system:
• Personal exemptions.
• Standard deduction (if you don’t itemize, this is
• State income tax paid (if you itemize).
• Miscellaneous itemized deductions subject to the
• The deferral of income from the exercise of ISOs.
Note: There is one item that is taxed earlier for AMT than
for regular tax, incentive stock options (ISOs). For regular
tax purposes, the taxpayer is not taxed on the ISO until
it is sold. For AMT, if the ISO is not sold within the year
it is exercised, the bargain element is added to alternative
minimum tax income.
Potential Credit for These Taxes
You may be able to obtain a credit for your prior year(s)
minimum tax that you paid. Form 8801, Credit for Prior
Year Minimum Tax, is used to calculate the credit. The
calculation of this credit is complicated and depending
on what caused your AMT, you may get some, all, or
none of the AMT paid as a credit. Discuss this with your
What Are the Latest Developments in
Congress on AMT?
For a number of years, the AMT has been a popular
topic with Congress. There are some who suggest getting
rid of it altogether. If they were to get rid of the system,
there would have to be either a reduction in government
spending or another way to collect the additional revenues
currently generated by the AMT system.
Since 2001, Congress has passed what are often referred
to as AMT patches. The income level and exemptions
for AMT would still be at the 1993 amounts if Congress
did not act. If they did not pass an AMT patch every
year, more people would be subject to AMT than were
originally intended because the exemption and phaseout
amounts are not currently put into the tax law to be
adjusted for inflation.
In 2006, Congress expanded the applicability of the
minimum tax credit wherein there is a greater potential
to give taxpayers the minimum tax credit sooner rather
than later. The change in the tax law is only through the
2012 tax year.
Help is Available
The AMT calculation and the minimum tax credit are
complex calculations best handled by a tax professional.
This brochure is meant to provide a basic overview of
these concepts. For further information and assistance,
consult with your tax professional.
This brochure contains general tax information for taxpayers.
As each tax situation may be different, do not rely upon this
information as your sole source of authority. Please seek
professional advice for all tax situations.
#875 – © Copyright May 2010
National Association of Tax Professionals
PO Box 8002
Appleton, WI 54912-8002