Differences Between Regular and Alternative Minimum Tax
This material will explore the difference between the regular tax computation and the tentative AMT computation to facilitate the understanding of the various factors that can create an AMT and the steps that can be taken to avoid or minimize the AMT. The course explanations generally follow the sequence of the Form 6251. The AMT calculation on Form 6251 starts with the regular taxable income amount to which is added or subtracted the AMT adjustments.
References below to the Form 6251-line numbers are from the 2023 Form 6251.
Regular Tax Exemptions
Note: regular tax exemptions are suspended for years 2018 through 2025 and thus they no longer create an AMT difference. In other years, for AMT purposes, the regular personal exemptions are not allowed.
Itemized Deductions
For AMT purposes, medical expenses are not a preference item since the 7.5% of AGI floor applies to both regular tax and AMT computations. Other deductions allowed for AMT are acquisition debt interest, investment interest, charitable deductions, personal casualty losses (only disaster losses in 2018-2025), and tier 1 miscellaneous deductions.
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For AMT Purposes the Standard Deduction is Not Allowed - In TCM 2003-23 D.M. Marx, the Tax Court ruled that the taxpayer cannot take the standard deduction for regular tax purposes and itemize for the AMT., Thus, the same deductions must be used for both computations., This creates sort of a dilemma for those who don’t have enough to itemize for regular tax purposes but do have substantial itemized deductions that can be used to offset the AMT. ,
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Strategy - Taxpayers can elect to itemize - even if the deductions are less than the standard deduction., Schedule A has a specific box to check if this election is being made; see line 18 of the 2021 Schedule A., However, by forcing itemized deductions, the regular tax will be increased and at the same time, the AMT tax will be reduced., This presents a complicated moving target for the tax practitioner.,
Ideally, the itemized deductions should be an amount that will make the regular tax and the tentative AMT the same, thereby bringing the AMT add-on tax to “zero.” This can be accomplished by trial and error on your tax program or those with good algebra skills can calculate the ideal amount by keeping in mind the AMT is moving down at 26% or 28%, while the regular tax is increasing at the taxpayer’s marginal rate. Bottom line - Utilizing this strategy may possibly save a considerable amount of money for taxpayers who are subject to the AMT but whose itemized deductions are somewhat less than the standard allowance.
Medical Deductions
The medical AGI reduction percentage is the same for regular tax and AMT.
Tax Deductions
(Form 6251 – 2a) – The taxes claimed as part of regular tax itemized deductions are NOT ALLOWED as a deduction against the AMT. They are added back on line 2a of Form 6251. The effect of not allowing a deduction for taxes is minimized by the $10,000 limit on the deduction for state and local taxes imposed by TCJA for years 2018 through 2015.