The Alternative Minimum Tax and Form 6251

Get familiar with the Alternative Minimum Tax and learn what triggers this part of the tax code.

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Get your pillow out: I’m going to talk taxes. If you can stay awake until the end of the article, you’ll come away with three important points about the U.S. tax code. First, we’ll talk about the Alternative Minimum Tax. Then, we’ll review what triggers this part of the tax code and lastly, we’ll introduce you to Form 6251.

You’re probably already familiar with the regular income tax system, gift tax, and inheritance tax. Do you need to worry about the alternative minimum tax, too? Let’s back up for a moment. The alternative minimum tax (AMT) is nothing new. AMT has been around since 1969. It was designed to make sure wealthy taxpayers paid their fair share. It was initially intended to target fewer than 200 people who were using every legal tax break and deduction they could find, effectively eliminating their tax liability. However, recently more and more taxpayers have been getting caught up in the AMT side of the tax code. The good news is that it was indexed for inflation in 2013. The recent Tax Cuts and Jobs Act of 2017 also helped to lower the number of taxpayers affected by AMT, from 5,000,000 to 200,000.

The IRS tax code has numerous tax breaks and deductions.

The AMT is designed to make sure taxpayers pay at least a certain minimum in taxes by only reducing their regular incomes to a certain level. AMT is designed to run alongside the regular income tax code and doesn’t affect everyone. It is a complex calculation and involves more than just totaling income. It also matters where the income comes from. For example, private activity tax-exempt bond interest may be added back in to complete the AMT calculation. Different types of deductions might also be disallowed like accelerated depreciation, net operating losses, and several others. These and many other tax breaks may be used to reduce income taxation, but will be added back in when calculating AMT. So, how do you know if you owe AMT? Form 1040 is a good place to start.

The 1040 has a basic calculation to determine if AMT is owed. Form 6251 is an IRS form issued to help taxpayers figure out how much AMT they are responsible for. Modern tax software can also do the computation. If, after doing the calculations, the amount owed on Form 6251 is greater than the regularly calculated income tax, taxpayers must pay an additional AMT tax. More good news for some taxpayers is that there are income exemption limits. Some bad news for others is that there are also phase outs.

In 2019, the income AMT exemption limits are:

  • Single taxpayers: $71,700
  • Married taxpayers filing jointly: $111,700

In 2019, the AMT phaseout starts at:

  • Single taxpayers: $510,300
  • Joint Taxpayers: $1,020,600

The basic steps for calculating AMT are as follows:

  1. Calculate your taxable income minus any tax exclusions dictated by the AMT.
  2. Once you have your newly calculated taxable income, subtract the above applicable income exemption amount.
  3. Multiply the remainder by the appropriate AMT tax rate, which is currently either 26% or 28% (based on income level).
  4. Subtract the AMT foreign tax credit.
  5. If the income tax is higher than the regular income tax calculation, the difference would be owed in the form of an AMT tax.

Are we done? Not quite. Future tax years can also be affected by past year AMT calculations.

The US tax code is tens of thousands of pages long and is getting longer every year. Some resources to help figure out AMT and other parts of the tax code are available online, along with the tax code in its entirety. You can also go directly to the IRS website and read publications that explain and interpret the tax code. But if you think you will owe AMT, save yourself the headache and call your tax professional.

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