Although it is called Alternative Minimum Tax (AMT), it is not alternative or optional. It is mandatory tax paid only if it exceeds the regular tax liability. The AMT is devised to ensure that high-income taxpayers who make use of certain tax deductions, exemptions, losses, and credits, pay at least a minimum amount of tax. A taxpayer’s AMT for a tax year is the excess of the tentative minimum tax over regular tax liability.
Calculating AMT: To calculate the tentative minimum tax, the taxpayer must first determine the Alternative Minimum Taxable Income (AMTI) and then subtract the AMTI exemption amount. The difference is multiplied by AMT rate (26 percent to 28 percent) to arrive at the tentative minimum tax. The AMTI is taxable income recomputed taking into account adjustments and preferences. Certain itemized deductions such as state and local taxes, miscellaneous itemized deductions subject to 2 percent AGI floor, and home mortgage interest on refinanced amounts above the balance of existing loans, are completely disallowed for AMT purpose.
New Developments in The Jobs & Growth Tax Relief Reconciliation Act of 2003 Relating to AMT:
1. The 2003 Act reduces long-term capital gain rates from a minimum of 5 percent to a maximum of 15 percent. The reduced long-term capital gain rates are also effective for AMT purposes.
2. The act provides 7 percent rather than 42 percent of the amount excluded from gross income relative to qualified small business stock sale will be treated a preference for AMT purposes.
3. Qualified dividend income is taxed at the same rates that apply to net capital gains for both regular tax and the AMT.
4. The 2003 Act provides for 50 percent additional first year depreciation and the AMT depreciation adjustment is not required for certain tangible properties acquired after May 5, 2003 and before Jan. 1, 2005.
Incentive Stock Options (ISO): Stock acquired under an ISO plan receives the most favorable capital gain tax rate if stock is not disposed of within two years after the grant or one year after exercise. For regular tax purposes, no income is recognized when an ISO is exercised. Generally, for the purpose of AMT, however, the excess of the fair market value of the stock acquired by ISO exercise over the option price is AMT adjustment and included in the computation of the AMTI in the year of exercise.
However, if you acquired stock by exercising an ISO and disposed of that stock in the same year, the tax treatment under the regular tax and the AMT is the same and no AMT adjustment is required.
AMT Credit: When a taxpayer pays AMT due to the exercise of an ISO, the net AMT is generally allowed as a credit against the regular tax liability of the taxpayer in subsequent years. The AMT credit cannot be used to reduce AMT in subsequent years and can be carried forward indefinitely.
The most up-to-date information regarding AMT can be found in Form 8801: Credit For Prior Year Minimum Tax—Individuals, Estates and Trusts, and in the instructions for Form 6251: Alternative Minimum Tax—Individuals.
Parveen Maheshwari, C.P.A. has an office in Bur-lingame. (650) 340-1400. firstname.lastname@example.org