Chapter 23

Alternative Minimum Tax (AMT)

The purpose of AMT is to effectively take back some of the tax breaks allowed for regular tax purposes. 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 included on the line for “Tax” on Form 1040A.

23.1 Computing Alternative Minimum Tax on Form 6251

23.2 Adjustments and Preferences for AMT

23.3 Tax Credits Allowed Against AMT

23.4 AMT Tax Credit From Regular Tax

23.5 Avoiding AMT

Table 23-1 Key to AMT Rules for 2012

Item— AMT Rule—
Tax rate A 26% rate applies to AMT taxable income of $175,000 or less (after the AMT exemption), $87,500 or less if married filing separately. A 28% rate applies to AMT income exceeding the $175,000 or $87,500 threshold.
AMT taxable income Regular taxable income without personal exemptions, increased or decreased by adjustments and increased by preferences.
AMT exemption The expected annual exemption “patch” for the AMT exemptions (23.1) had not yet been enacted when this book went to press.
AMT adjustments and preference items Itemized deductions for taxes, certain interest, and most miscellaneous deductions are not allowed.
Personal exemptions and the standard deduction are not allowed.
Tax-exempt interest from certain private activity bonds.
MACRS depreciation is figured under the alternative MACRS system for real estate using 40-year straight-line recovery, and, for personal property, the 150% declining balance method.
For incentive stock options; see 23.2.
If you sell qualified small business stock that qualifies for an exclusion (5.7), 7% of the exclusion is a preference item.
Mining exploration and development costs are allowable costs amortized over 10 years.
For long-term contracts, income is generally figured under the percentage-of-completion method.
Pollution control facilities amortization is figured under alternate MACRS.
Alternative tax net operating loss is allowed with adjustments.
Circulation expenditures must be amortized ratably over three years.
Research and experimental expenditures must be amortized ratably over 10 years.
Passive activity losses are recomputed; certain tax-shelter farm losses may not be allowed.
Adjusted gross income In making AMT computations involving adjusted gross income limitations, use adjusted gross income as computed for regular tax purposes.
Partnership AMT If you are a partner, include for AMT your distributive share of the partnership’s adjustments and tax preference items. These are reported on Schedule K-1 (Form 1065). The partnership itself does not pay alternative minimum tax.
Trust or estate AMT If you are a beneficiary of an estate or trust, consider for AMT your share of distributable net alternative minimum taxable income shown on Schedule K-1 (Form 1041). The estate or trust must pay tax on any remaining alternative minimum taxable income.
S corporation stockholder If you are a shareholder, consider for AMT your share of the adjustments and tax preference items reported on Schedule K-1 (Form 1120-S).
Children subject to “kiddie tax” Children under age 24 who are subject to the “kiddie tax” (24.3) for 2012 may have to compute AMT liability on Form 6251. The 2012 AMT exemption for a child subject to the “kiddie tax” generally equals the child’s earned income plus $6,950.
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