What Tech Employees Should Know About The Alternative Minimum Tax

What Is Alternative Minimum Tax?

For starters, the Alternative Minimum Tax is exactly what it sounds like—a separate tax system designed to ensure high-earners pay their fair share (an alternative minimum as it were) of taxes if their regular tax bill is too low.

So how does it work? 

AMT is an entirely different way to determine how much you owe in taxes. Essentially, you calculate your taxes under each system and pay whichever bill is higher. In some ways, AMT is a bit simpler. Instead of seven different tax brackets, there are just two: 26% and 28%.

Using tax prep software automatically calculates your tax bill according to each, so there’s no need to do anything differently. A tax professional will calculate the AMT when your income indicates you may be nearing the thresholds. If you file your own, you’ll need to fill out IRS Form 6251. 

So what makes the AMT tax calculation different from your regular tax code?

The main differentiator is that AMT limits certain deductions and credits for high-earners. We will look at some specific examples later, but Form 6251 has a comprehensive review. 

What Are The AMT Exemption Amounts for 2022?

Think of the AMT exemption as the “standard deduction” for the AMT calculation. Before applying the tax rate, you subtract this amount from your alternative minimum taxable income (AMTI). 

For 2022, the AMT exemption amounts are $75,900  for single filers and $118,100 if you are married filing jointly.

The exemption is reduced by 25 cents for every dollar earned above $539,900. If your AMTI is $539,901, then your exemption is $75,899.75. The phaseout starts at $1,079,800 if you are married and file a joint return. 

After subtracting the exemption amount from your AMTI, the 26% rate applies to income up to $206,100 for all taxpayers. The 28% rate applies to income above that amount.