Topics
- The AMT -- An Overview
- Computing Alternative Minimum Tax on Form 6251
- Adjustments for AMT
- Standard Deduction and Personal Exemptions Not Allowed
- Certain Itemized Deductions Disallowed for AMT Purposes
- Mortgage Interest
- Taxes
- Medical Expenses
- Miscellaneous Deductions
- Investment Interest
- Incentive Stock Option (ISO)
- Other Adjustments
The AMT -- An Overview
The AMT is an additional tax that you may owe if for regular tax purposes you claimed:
- Itemized deductions, such as taxes, interest on home equity loans used for nonresidential purposes, medical expenses, and miscellaneous job and investment expenses.
- Certain tax-exempt interest, accelerated depreciation, and incentive stock option benefits.
- A substantial number of exemptions for dependents.
There are no specific tests to determine whether or not you are liable for AMT. You must first figure your regular income tax and then see whether tax benefit items must be added back to taxable income to figure alternative minimum taxable income, on which the AMT is figured. If after claiming the AMT exemption and applying the AMT rates of 26% and 28% the tentative alternative minimum tax exceeds your regular income tax, the excess is your AMT liability, which is added to the regular tax on your return. In other words, your tax liability for the year will be the greater of your regular tax or your AMT.
AMT liability is figured on Form 6251 and is attached to Form 1040. If you file Form 1040A, AMT liability, if any, is figured on a worksheet and the AMT is entered on the line for total tax on Form 1040A.
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Computing Alternative Minimum Tax on Form 6251
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if any.
AMT adjustments and preferences are generally added back to regular taxable income to calculate alternative minimum taxable income (AMTI). The items that most commonly get added back to income when calculating AMTI are personal exemptions, state and local taxes, and miscellaneous itemized deductions.
AMTI is reduced by the allowable AMT exemption. Subject to the phaseout rule, the exemption for 2008 is $46,200 if single or head of household, $69,950 if married filing jointly or qualifying widow(er), or $34,975 if married filing separately.
After reducing AMTI by the allowable exemption, a 26% AMT rate generally applies to the first $175,000 of AMT income ($87,500 if married filing separately), and a 28% rate applies to any balance of the AMT income. However, if you had net capital gains that qualify for reduced capital gains rates, you apply the same capital gains rate for AMT purposes as for regular income tax purposes.
The resulting tax, less any AMT foreign tax credit, is the tentative AMT, which applies only to the extent it exceeds your regular income tax. For this purpose, regular income tax is the tax on your taxable income, without taking into account personal credits (such as the child tax credit or education credits), minus any special averaging tax on a lump-sum distribution or any regular foreign tax credit. The excess of tentative AMT over this regular tax, if any, is the AMT liability that you must report as an additional tax on Line 45 of Form 1040.
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Adjustments for AMT
The starting point for figuring AMT is your adjusted gross income from Form 1040. This amount will generally be increased by adjustments on Form 6251. The adjustments are outlined in each section below.
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Standard Deduction and Personal Exemptions Not Allowed
If you claimed the standard deduction for regular tax purposes, the deduction is disregarded when figuring AMT liability. You also must disregard the personal exemptions claimed for regular tax purposes.
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Certain Itemized Deductions Disallowed for AMT Purposes
Some key itemized deductions claimed on Schedule A are disallowed or reduced when figuring alternative minimum taxable income (AMTI) on Form 6251. For example, no AMT deduction is allowed for state and local income (or, if elected, sales) taxes, real property taxes, or personal property taxes, or for foreign income or real property taxes. Also not allowed for AMT purposes are miscellaneous itemized deductions that were allowed on Schedule A after application of the 2% AGI floor. A smaller deduction for medical expenses is allowed for AMT than for regular tax purposes. The deduction for interest on home equity mortgage loans may have to be reduced. Investment interest may have to be refigured for AMT.
On the other hand, if some of your itemized deductions were disallowed on Schedule A by the 3% reduction rule for taxpayers with adjusted gross income over $159,950 ($79,975 if married filing separately), the disallowed amount is entered as a negative adjustment to AMTI.
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Mortgage Interest
Less interest may be deductible for AMT purposes than for regular tax purposes. If an interest deduction is claimed on Schedule A for debt that does not qualify under the AMT rules, that interest is added back as an adjustment on Form 6251.
No AMT adjustment is required for home mortgage interest paid on a debt incurred to buy, construct, or substantially rehabilitate your principal residence or qualifying second residence. The residence may be a house, apartment, cooperative apartment, condominium, or mobile home not used on a transient basis. Nor is an adjustment required for interest on a debt incurred before July 1, 1982, provided that the mortgage was secured at the time it was taken out by your principal residence or any other home used by you or a family member.
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Taxes
State, local, and foreign taxes deducted on Schedule A must be added back to income in figuring AMT. If in 2008 you received a refund of taxes deducted in a prior year and the refund is reported as income on your 2008 Form 1040, you enter the refund on Form 6251 (Line 8) as a negative adjustment in figuring alternative minimum taxable income.
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Medical Expenses
If medical expenses in excess of the 7.5% AGI floor are deducted for regular tax purposes, you must add back to income on Form 6251 the smaller of the allowable medical deduction from Schedule A or 2.5% of adjusted gross income. This adjustment is to allow medical expenses as an AMT deduction only to the extent that they exceed 10% of AGI.
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Miscellaneous Deductions
In figuring alternative minimum taxable income (AMTI), you may not deduct miscellaneous itemized deductions in excess of 2% of adjusted gross income that you claim on Schedule A. These include unreimbursed job expenses, tax preparation fees, and contingent legal fees paid to recover taxable damages in employment or personal legal actions.
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Investment Interest
If for regular tax purposes you claimed an itemized deduction (Schedule A) for investment interest on Form 4952, you must complete a second Form 4952 to determine if your allowable deduction for AMT is more or less than the itemized deduction, taking into account AMT adjustments and preferences. The difference between the regular tax deduction and the allowable AMT deduction is entered on Form 6251 as a positive adjustment if the regular tax deduction is more, or as a negative adjustment if the AMT amount is more. For example, if you paid interest on a home equity loan whose proceeds were invested in stocks or bonds, that interest is not treated as investment interest on Form 4952 when figuring the itemized deduction for regular tax purposes, but it is included as investment interest on the second Form 4952 used to figure the allowable AMT amount.
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Incentive Stock Option (ISO)
For regular tax purposes, you are not taxed when you exercise an incentive stock option (ISO). However, the exercise of an ISO can result in a substantial AMT liability. You generally must increase AMT income by including on Form 6251 the excess, if any, of:
1. The fair market value of the stock acquired through exercise of the option (determined without regard to any lapse restriction) when your rights in the acquired stock first become transferable or when these rights are no longer subject to a substantial risk of forfeiture, over
2. The amount you paid for the stock, including any amount you paid for the ISO used to acquire the stock.
Note: If you acquire stock by exercising an ISO and you dispose of that stock in the same year, the tax treatment under the regular tax and the AMT is the same. No AMT adjustment is required. If you exercised ISOs in the past and have an unused minimum tax credit, there is a refundable credit for 2008 for a portion of this old credit. The credit rules are explained on Form 8801.
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Other Adjustments
Adjustments must also be made for:
- MACRS depreciation
- Mining exploration and development costs
- Circulation costs
- Long-term contracts
- Amortization of certified pollution control facilities
- Research and experimental expenditures
- Passive tax-shelter farm losses
- Passive losses from nonfarming activities
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Summary
- The AMT effectively takes back some of the tax breaks allowed for regular tax purposes.
- There are no specific tests to determine whether or not you are liable for AMT. You must first figure your regular income tax and then see whether tax benefit items must be added back to taxable income to figure alternative minimum taxable income, on which the AMT is figured.
- AMT adjustments and preferences are generally added back to regular taxable income to calculate alternative minimum taxable income (AMTI). The items that most commonly get added back to income when calculating AMTI are personal exemptions, state and local taxes, and miscellaneous itemized deductions.
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