Alternative minimum tax.
In addition to the tax calculated under the normal rates, it is sometimes necessary for a taxpayer to pay the alternative minimum tax (AMT). The AMT is calculated by first determining the alternative minimum taxable income (AMTI), reducing this amount by the allowable exemption to determine taxable excess, and then applying a two-tier tax rate schedule to the amount of the taxable excess. The two-tier rate schedule applies a 26% rate to taxable excess that does not exceed $175,000 ($87,500 for married taxpayers filing separately), and a 28% rate to taxable excess over that amount. The resulting amount is the taxpayer's tentative minimum tax. The preferential tax rates on certain capital gains held for more than twelve months and certain dividends are also used when determining the taxpayer's tentative minimum tax (see Q 1420). (1)
If the tentative minimum tax reduced by the AMT foreign tax credit exceeds the regularly calculated tax (with adjustments) for the tax year, the excess is the AMT. Regularly calculated tax for AMT purposes excludes certain taxes including: (1) the alternative minimum tax; (2) the tax on benefits paid from a qualified retirement plan in excess of the plan formula to a 5% owner; (3) the 10% penalty tax for certain premature distributions from annuity contracts; (4) the 10% additional tax on certain early distributions from qualified retirement plans; (5) the 10% additional tax for certain taxable distributions from modified endowment contracts; (6) taxes relating to the recapture of the federal subsidy from use of qualified mortgage bonds and mortgage credit certificates; (7) the additional tax on certain distributions from education IRAs; and (8) the 15% additional tax on medical savings account distributions not used for qualified medical expenses. Regularly calculated tax is reduced by the foreign tax credit, the Puerto Rico and possession tax credit, and the Puerto Rico economic activity credit. (2)
For tax years from 2000 through 2009, certain nonrefundable personal credits (see Q 1436) may be used to reduce the sum of a taxpayer's regular tax liability and AMT liability. (3)
For tax years beginning after 2009, certain nonrefundable personal credits (except for the adoption expenses credit, the child tax credit, and the credit for elective deferrals and IRA contributions) may not reduce a taxpayer's regular tax liability to less than the taxpayer's tentative minimum tax. (4)
Alternative Minimum Taxable Income
Alternative minimum taxable income is taxable income, with adjustments made in the way certain items are treated for AMT purposes, and increased by any items of tax preference. (5)
Except as otherwise provided below, the provisions that apply in determining the regular taxable income of a taxpayer also generally apply in determining the AMTI of the taxpayer. (6) In addition, references to a noncorporate taxpayer's adjusted gross income (AGI) or modified AGI in determining the amount of items of income, exclusion, or deduction must be treated as references to the taxpayer's AGI or modified AGI as determined for regular tax purposes. (1)
Exemption amounts of $70,950 (in 2009; $45,000 after 2009) on a joint return (or for a surviving spouse), $46,200 (in 2009; $33,750 after 2009) on a single return, $35,475 (in 2009; $22,500 after 2009) on a married filing separate return, and $22,500 on an estate or trust return, are available in calculating the taxable excess. These exemption amounts are reduced by 25% of the amount by which the AMTI exceeds $150,000 on a joint return, $112,500 on a single return and $75,000 on a separate return or in the case of an estate or trust. (2) In 2008, a married individual filing a separate return must increase AMTI by the lesser of (a) 25% of the excess of the AMTI over $214,900, or (b) $34,975. After 2008, a married individual filing a separate return must increase AMTI by the lesser of (a) 25% of the excess of the AMTI over $165,000, or (b) $22,500. (3) For children subject to the "kiddie tax" (Q 1411) the exemption is the lesser of the above amounts or the child's earned income plus $6,700 (as indexed for 2010). (4)
In general, the following adjustments are made to taxable income in computing alternative minimum taxable income: (1) generally, property must be depreciated using a less accelerated method or the straight line method over a period which is longer than that used for regular tax purposes, except that a longer period is not required for property placed in service after 1998; (2) the AMT net operating loss is deductible only up to 90% of AMTI determined without regard to such net operating loss; (3) no deduction is allowed for miscellaneous itemized deductions; (4) generally, no deduction is allowed for state and local taxes unless attributable to a trade or business, or property held for the production of income (recovery of state tax disallowed for AMT purposes in a previous year is not added to AMTI in the year recovered); (5) medical expenses are allowed as a deduction only to the extent such expenses exceed 10% of adjusted gross income; (6) interest on indebtedness secured by a primary or second residence is generally deductible (within dollar limitations) if incurred in acquiring, constructing, or substantially improving the residence; however, the amount of refinanced indebtedness with regard to which interest is deductible is limited to the amount of indebtedness immediately prior to refinancing; (7) no standard deduction is allowed; (8) no deduction for personal exemptions is allowed; (9) the limitation on itemized deductions for upper-income taxpayers does not apply; (10) the taxpayer will include any amount realized due to a transfer of stock pursuant to the exercise of an incentive stock option; (11) AMTI is determined using losses from any tax shelter farm activity (determined by taking into account the AMTI adjustments and tax preferences) only to the extent that the taxpayer is insolvent or when the tax shelter farm activity is disposed of; and (12) passive activity losses (determined by taking into account the adjustments to AMTI and tax preferences) are not allowed in determining AMTI except to the extent that the taxpayer is insolvent. (5)
Items of tax preference which must be added to AMTI include: (1) the excess of depletion over the adjusted basis of property (except in the case of certain independent producers and royalty owners); (2) the excess of intangible drilling costs expensed (other than drilling costs of a nonproductive well) over the amount allowable for the year if the intangible drilling costs had been amortized over a 10 year period to the extent the excess is greater than 65% of the net income from oil, gas, and geothermal properties (with an exception for certain independent producers); (3) tax-exempt interest on specified private activity bonds (but reduced by any deduction not allowed in computing the regular tax if the deduction would have been allowable if the tax-exempt interest were includable in gross income) (ARRA 2009 provides that tax-exempt interest from private activity bonds issued during 2009 and 2010 is not a tax preference); (4) accelerated depreciation or amortization on certain property placed in service before 1987; and (5) seven percent of the amount excluded under IRC Section 1202 (gain on sales of certain small business stock). (1)
Credit for Prior Year Minimum Tax Liability
A taxpayer subject to the AMT in one year may be allowed a minimum tax credit against regular tax liability in subsequent years. The credit is equal to the total of the adjusted minimum taxes imposed in prior years reduced by the amount of minimum tax credits allowable in prior years. However, the amount of the credit cannot be greater than the excess of the taxpayer's regular tax liability (reduced by certain credits such as certain business related credits and certain investment credits) over the tentative minimum tax. The adjusted net minimum tax for any year is the AMT for that year reduced by the amount that would be the AMT if: (1) the only adjustments were those concerning the limitations on certain deductions (such as state taxes, certain itemized deductions, the standard deduction and personal exemptions); (2) the only preferences were those dealing with depletion, tax exempt interest, and small business stock; and (3) the limit on the foreign minimum tax credit did not apply. The adjusted net minimum tax is increased by the amount of any nonconventional fuel source credit and qualified electric vehicles credit that was not allowed for that year due to the AMT. For tax years after 2006 and before 2013, if an individual has minimum tax credits that have not been usable for three years, those long-term unused credits may be treated as a refundable credit. (2)
(1.) IRC Secs. 55(a), 55(b).
(2.) IRC Secs. 55(c)(1), 26(b).
(3.) IRC Sec. 26(a), as amended by TEAMTRA 2008 and ARRA 2009.
(4.) IRC Sec. 26(a), as amended by TEAMTRA 2008 and ARRA 2009.
(5.) IRC Sec. 55(b)(2).
(6.) Treas. Reg. [section] 1.55-1(a).
(1.) Treas. Reg. [section] 1.55-1(b).
(2.) IRC Sec. 55(d), as amended by TEAMTRA 2008 and ARRA 2009.
(3.) See IRC Sec. 55(d), as amended by TEAMTRA 2008.
(4.) IRC Sec. 59(j); Rev. Proc. 2009-50, 2009-45 IRB 617.
(5.) IRC Secs. 56, 58.
(1.) IRC Sec. 57(a).
(2.) IRC Sec. 53.