What is the AMT?

The easiest way to envision the AMT is to think of it as a tax floor. Once your tax rate drops to that floor, the AMT won't allow it to go any lower.

Originally, the AMT was intended to reduce the amount of taxpayers who were not paying their fair share of income taxes by using tax incentives and credits to their advantage. Gradually, as the AMT expanded and inflation caused incomes to rise, the middle class started to feel the effects of this tax.

Recently with the passage of the Tax Cuts and Jobs Act (TCJA), the AMT rules have significantly changed. The revised rules should result in fewer people having to worry about paying AMT. However, the changes are temporary and apply only to tax years 2018 to 2025 unless Congress extends them or makes them permanent.

How does the AMT work?

The AMT requires you to include income from certain sources that the ordinary income tax system lets you exclude—for example, interest from private activity municipal bonds and the spread on the exercise of incentive stock options.

What triggers the AMT (for tax years 2018 to 2025)?

Deductions for state and local taxes paid

Do you live in a high-tax state? The AMT doesn't allow you to claim a deduction for state income or property taxes, so if you're in a state with high taxes you could be more exposed to the AMT than someone in a state with lower tax rates.

Having a high household income

If your household income is over the phase-out thresholds ($1,000,000 for married filing jointly and $500,000 for everyone else) and you have a significant amount of itemized deductions, the AMT could still affect you.

Realizing a large capital gain

Long-term gains (e.g., when you sell a home or other investments for a profit) are taxed at the same rate under both systems, but capital gains could put you over the AMT exemption threshold. That could cause the AMT to kick in, which means you won't be able to deduct state income taxes paid on the capital gains.

Exercising stock options

Exercising qualified employee stock options (also called incentive stock options or ISOs) to buy stock at a discounted price is normally not a taxable event until you sell the shares for a profit. The AMT creates a paper profit that's taxable even though it's not a real profit until you sell the shares.

For more comprehensive information, see IRS Form 6251 PDF.

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