For many, taxes are inherently complicated. Various forms, credits, deductions, and other rules applied in the regular tax system can be confusing enough, but there are certain circumstances during which additional rules and regulations may apply.

That’s the case for alternative minimum tax, which is a parallel tax system that comes into play when you reach a specific income threshold. 

Learn more about alternative minimum tax, when you may be required to file using the alternative minimum tax system, and how you may be able to avoid it. 

What Is the Alternative Minimum Tax?

Often referred to as a “parallel” or “shadow tax system,” the alternative minimum tax (AMT) is used to determine the minimum amount of taxes you must pay each year, regardless of how many deductions or credits you’re eligible for. 

The AMT is triggered by a taxpayer’s income and filing status. The table below includes the 2022 and 2023 exemption amounts. 

2022 and 2023 AMT Exemption Amounts

The exemption amounts begin to phase out at a certain threshold, meaning the more you make, the lower your exemption opportunity and the higher your AMT obligation. For instance, in 2022, exemptions phase out at $1,079,900 for married couples filing jointly. In 2023 that phaseout threshold is $1,156,300 for filers of the same status.

How to calculate the Alternative Minimum Tax?

The IRS bases AMT on the difference between an individual’s regular annual tax amount and what is known as a tentative minimum tax. If the amount you owe under the regular tax system is less than the tentative minimum tax for that same year, you’ll need to submit your taxes using the AMT system. 

To determine if you should file under the AMT system, you must figure out your regular tax responsibility and your tentative minimum tax. You can calculate your tentative minimum tax using the following steps: 

Step 1: Determine your taxable income minus any tax exclusions or deductions that are not made available under the AMT system. (See IRS Form 6251 for exclusions)

Step 2: Subtract the AMT exemption amount for the relevant tax year from your AMT tax responsibility calculated in Step 1 (Line 17 on Form 6251). 

Step 3: Multiply the amount determined in Step 2 by the appropriate AMT tax rate. The AMT tax rate depends on your income and is available on Line 18 of IRS Form 6251. 

For the 2022 filing year, a 26% tax applies to amounts of $206,100 or less ($103,050 if you file married filing separately). If the amount is higher than that, multiply it by 28% and subtract $4,122 ($2,061 if married filing separately). 

Step 4: If you’re eligible for an AMT foreign tax credit, subtract it.

Step 5: Compare your AMT-based income tax to your regular income tax. If the outcome under the AMT tax system is higher, then you must pay the higher amount or the alternative minimum tax. 

What is the purpose of AMT?

The IRS implemented the AMT in 1969 as an effort to address high-income citizens avoiding paying higher federal taxes by leveraging multiple tax breaks and loopholes. 

Though the AMT was originally designed to address a narrow problem among a small group of wealthy taxpayers, a lack of inflation-based adjustments left many middle-class Americans responsible for AMT adjustments each year. 

Over the years, there were several issues needed to be addressed, such as implementing patches to the AMT. After the passage of the 2012 Tax Relief Act,  the IRS continues to index the AMT for inflation. 

What is Form 6251?

IRS Form 6251 determines your alternative minimum tax obligation, if any. It can be completed and filed online, or you can download and print the form to complete it offline.  

There are two primary parts to Form 6251, though taxpayers eligible for a foreign-earned income tax credit will need to complete Part III:

Form 6251 Part I

Part I of Form 6251 deals with your income. To complete this part, you will need the information included in your Form 1040 or Form 1040-SR. This includes your taxable income and any refunds and deductions you claimed. 

In addition to this information, some taxpayers may need to provide additional itemized information, such as investment interest expenses, net operating loss deductions as entered on Schedule 1 (Form 1040), and interest from specified private activity bonds. (See Form 6151 2a – 2t for a full list of itemized items). 

Part I also includes fields for other adjustments that may be relevant to your AMT.  

Form 6251 Part II

The fields in Part II are used to determine your AMT amount. Once you complete this form, compare the amount in Line 11 to your tax liability from Form 1040. If the amount in Line 11 on Form 6251 is higher than your liability on Form 1040, you must use the AMT rules when filing your taxes that year.

Are IRA Deductions Taxed Under the AMT?

Fortunately, all non-taxable withdrawals from a Roth IRA or self-directed IRA are not considered part of your income and are not subject to the AMT. 

Ways to Avoid the AMT

AMT can result in a substantial tax obligation. However, there are some ways to reduce your taxable income and avoid or reduce filing AMT: 

• Max out your retirement plan, specifically if you participate in a qualifying pre-tax retirement plan, such as a 401(k), 403(b), or SIMPLE IRA. 
• Delay paying real estate or fourth-quarter estimated state tax payments until the new year. Paying them in December will not help you if you are subject to AMT rules that year. 
• Leverage business tax deductions, such as home office expenses, business vehicles, or rental property, as Schedule C deductions are eligible when calculating AMT.
• Take advantage of pre-tax contribution opportunities, such as a flexible healthcare spending account (FSA).
• Decrease your AGI by choosing tax-efficient bonds and mutual funds.
• If you are required to enter an amount for Line 9 in Form 6251 (depletion from oil, mining, timber, gas, etc.), use the cost method of depletion. 
• If you plan on selling qualified small business stock, try to time it so that any other AMT adjustments are reduced or eliminated. 

How you minimize or avoid your AMT obligations depends on various factors, including your taxable income and your investments. Not sure how your self-directed IRA or other investment activities impact your AMT obligations? Speaking with a financial advisor can help you identify specific ways to reduce or eliminate your AMT burden. 

Additionally, understanding IRS rules regarding AMT can help you plan for your tax obligations, as well as retirement planning. It can also help you reduce or eliminate AMT.