23.2 Adjustments and Preferences for AMT
If you itemize deductions on Schedule A, the starting point for figuring alternative minimum taxable income (AMTI) on Form 6251 is your adjusted gross income reduced by the itemized deductions. If you claim the standard deduction, the AMT starting point is your adjusted gross income; the standard deduction is not allowed when figuring AMTI. Personal exemptions claimed for regular tax purposes are also not allowed for AMT purposes.
Caution
You have to add back to your income certain tax breaks allowed for regular tax purposes, as described below. In some cases, a negative adjustment reduces AMTI. Some of the items discussed below are technically “preference items” under the Internal Revenue Code (such as interest from private activity bonds), rather than “adjustments”, but the IRS lists them together on Part I of Form 6251 as items that increase or decrease AMTI.
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.
Court Decision
The required AMT adjustments for these deductions are discussed in the following paragraphs.
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.
An adjustment is required for home mortgage interest on a loan used for any purpose other than to buy, build, or substantially improve your principal residence or second residence. If your Schedule A deduction includes interest on a refinanced loan (including a second or later refinancing), you must treat as an AMT adjustment any interest on the new mortgage balance that exceeded the balance of the prior debt immediately before the refinancing (whether it was the balance of the original debt or balance of a prior refinancing).
The instructions to Form 6251 have a worksheet for figuring the home mortgage interest adjustment.
Taxes.
State, local, and foreign taxes deducted on Schedule A must be added back to income in figuring AMT.
If you received in 2012 a refund of taxes deducted in a prior year and the refund is reported as income on your 2012 Form 1040 (11.5–11.6), you enter the refund on Form 6251 as a negative adjustment in figuring alternative minimum taxable income.
Medical expenses.
If medical expenses in excess of the 7.5% AGI floor are deducted for 2012 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. The effect of this adjustment is to allow medical expenses as an AMT deduction only to the extent that they exceed 10% of AGI.
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 (19.3), tax preparation fees (19.16), and contingent legal fees paid to recover taxable damages in employment or personal legal actions (19.18).
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.
Net operating losses.
A net operating loss (NOL) claimed for regular tax purposes must be recomputed for AMT. The recomputed loss, or ATNOLD (alternative tax net operating loss deduction), is generally the excess of the deductions allowed in figuring AMTI (alternative minimum taxable income) over the income included in AMTI. For example, the nonbusiness deduction adjustment (40.19) must be separately figured for the ATNOLD, taking into account only nonbusiness income and deductions included in AMTI. Thus, state and local taxes and other itemized deductions that are not allowable AMT deductions (23.2) do not reduce nonbusiness income in figuring the ATNOLD.
The ATNOLD generally is limited to 90% of AMTI but certain losses are not subject to the 90% limit; see the instructions to Form 6251 for further details.
Tax-exempt interest on private activity bonds.
You generally must increase alternative minimum taxable income (AMTI) by tax-exempt interest on private activity bonds issued after August 7, 1986 and before 2009, and on such bonds issued after 2010, but this does not include qualified 501(3) bonds, New York Liberty bonds, Gulf Opportunity Zone bonds, and Midwestern disaster area bonds. Also, if issued after July 30, 2008, qualified mortgage bonds, veterans’ mortgage bonds, and exempt-facility bonds that have at least 95% of the net proceeds going to fund qualified residential rental projects are not treated as private activity bonds for AMT purposes.
Filing Instruction
Any bonds issued in 2009 and 2010 that would otherwise be treated as private activity bonds are not considered private activity bonds, so the interest on the 2009/2010 bonds does not get added back to AMTI.
Exclusion on qualifying small business stock.
If you sold small business stock qualifying for the 50% or 60% exclusion (5.7), 7% of the excluded gain must be added as a positive adjustment to AMTI.
Incentive stock option (ISO).
For regular tax purposes, you are not taxed when you exercise an incentive stock option (ISO) (2.16). 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. However, if you do not sell the stock in the same year that the option is exercised, 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:
Caution
If your rights in the acquired ISO stock are not transferable and are subject to a substantial risk of forfeiture in the year you exercise the ISO, you do not report the AMT adjustment until the year your rights become transferable or are no longer forfeitable. However, within 30 days of the transfer to you of the stock acquired through exercise of the ISO, you may elect to include in AMT income for that year the excess of the stock’s fair market value (determined without regard to any lapse restriction) over the exercise price; see the discussion of the Section 83(b) election at 2.17.
If you report an AMT adjustment for stock acquired through the exercise of an ISO, increase the AMT basis of the stock by the amount of the adjustment. Since the AMT basis in stock acquired through an ISO is likely to be significantly higher than your regular tax basis, you may have a larger gain for regular tax purposes and a larger loss for AMT purposes in the year you sell the stock. This would produce a negative adjustment for AMT. Follow the Form 6251 instructions to the line for “Dispositions of Property”.
MACRS depreciation.
Depreciation allowed for AMT may differ from that allowed for regular tax purposes. For tangible personal property (such as cars or furniture) placed in service before 1999, the AMT depreciation rate is the 150% declining balance method over the alternative depreciation system recovery period (ADS; see 42.9), switching to the straight-line method once it provides a larger deduction than the 150% method. For tangible personal property placed in service after 1998, the AMT deduction is figured using the 150% declining balance rate (switching to straight line when it gives a larger deduction) over the general depreciation system (GDS) recovery periods of three, five, seven, or 10 years (42.4). However, no AMT adjustment is required for property for which bonus depreciation (42.21) was claimed, provided that the depreciable basis of the property is the same for AMT as for regular tax purposes. Real property placed in service before 1999 is depreciated for AMT over a 40-year period using the straight-line method. Depreciation deductions for films, videotapes, and sound recordings under the unit-of-production method or other method not based on a term of years are not adjusted under AMT.
Planning Reminder
If, for regular tax purposes, you use the regular 200% declining balance method to depreciate business equipment with a recovery period of three, five, seven, or 10 years, the difference between the regular depreciation and the 150% rate for AMT is generally an adjustment, but there is an exception for property eligible for bonus depreciation (42.21); see the Form 6251 instructions. For real estate placed in service before 1999, the adjustment is the difference between the straight-line depreciation claimed for regular tax purposes using the recovery period discussed in 42.13 and the straight-line recovery over the AMT 40-year recovery period.
The adjustment for MACRS may result in providing more depreciation for AMT purposes where the AMT depreciation computation towards the latter part of the useful life of the property provides larger deductions than the regular MACRS deduction. If the AMT deduction exceeds the regular tax deduction, the difference is entered as a negative adjustment that reduces alternative minimum taxable income.
Basis adjustment affects AMT gain or loss.
When post-1986 depreciable assets are sold, gain for AMT purposes is figured on the basis of the property as adjusted by depreciation claimed for AMT purposes. This gain or loss will be different from the gain or loss figured for regular tax purposes where regular MACRS depreciation was used.
Oil and gas costs.
Independent oil and gas producers and royalty owners do not have to refigure depletion deductions for the AMT. Excess intangible drilling costs (IDC) are generally not treated as a preference item unless they exceed 40% of AMT income; see the instructions to Form 6251.
Mining exploration and development costs.
Unless the optional 10-year deduction was elected for regular tax purposes for mining exploration and development costs, the costs must be amortized ratably over a 10-year period for AMT purposes. The difference between the regular tax deduction and AMT deduction is entered on Form 6251 as an adjustment (positive or negative).
If a mine is abandoned as worthless, all mining exploration and development costs that have not been written off are deductible in the year of abandonment.
Circulation costs.
If circulation costs were deducted in full for regular tax purposes (instead of using the optional three-year write-off), they must be amortized over three years for the AMT. The difference between the two allowable deductions must be reported as an adjustment on Form 6251, as either a positive or negative amount.
Long-term contracts.
The use of the completed contract method of accounting or certain other methods of accounting for long-term contracts is generally not allowable for AMT. The percentage of completion method must be used to figure the AMT income from a long-term contract. However, there is an exception for home construction contracts. The difference between the regular tax and AMT income is an AMT adjustment, either positive or negative.
Research and experimental expenditures.
Costs must be amortized over 10 years for AMT purposes if incurred in a business in which you are not a material participant. The difference between the regular tax and AMT deductions must be entered as an adjustment (positive or negative) on Form 6251.
Passive tax-shelter farm losses.
Generally, no AMT loss is deductible for any tax-shelter farm activity. A tax-shelter farm activity is any farming syndicate or any farming activity in which you do not materially participate. You may be treated as a material participant if a member of your family materially participates or you meet certain retirement or disability tests discussed at 10.6.
Gains and losses reported for regular tax purposes from tax-shelter farm activities must be refigured by taking into account any AMT adjustments and preferences. However, a refigured loss is not allowed for AMT purposes except to the extent that you are insolvent at the end of the year. This means that you deduct the loss to the extent of your insolvency. Insolvency is the excess of liabilities over fair market value of assets. Any AMT-disallowed loss is carried forward to later years in which there is gain from that same activity, or until you dispose of the activity.
Passive losses from nonfarming activities.
These are adjusted for preference or adjustment items not allowed for AMT purposes. For example, an adjustment for MACRS depreciation is made directly against the passive loss and is not treated as a separate AMT adjustment item. The loss allowed for AMT purposes is increased by the amount by which you are insolvent at the end of the year. See the instructions to Form 6251, which suggest that the AMT adjustment of passive losses be figured on a separate Form 8582 that you do not file.