The Alternative Minimum Tax (AMT) is a separate tax imposed in addition to taxes calculated for regular federal income taxes. Most individual taxpayers will never have an AMT issue with their tax returns.
The principal purpose of AMT is to ensure that individuals with economic income pay at least some federal income taxes. Certain types of income and deductions are treated differently under regular federal income tax and alternative minimum tax.
Two different types of adjustments cause AMT: deferral items and exclusion items. A deferral item is a temporary tax difference while an exclusion item creates a permanent tax difference between regular tax and AMT.
For example, suppose a taxpayer can exclude an income item in Year 1, but the item will be taxable upon the occurrence of some future event. The income item would be a “deferral” item for the taxpayer because, eventually, it will be subject to taxation.
Taxpayers can find a list of adjustments in IRC Section 56. Some of the most common adjustments between regular tax and AMT include the following:
- State and local tax refunds
- Net operating loss (NOL) deductions
- Private activity bond interest
- Exercise of incentive stock option (ISO)
- Depreciation differences between AMT and regular tax
- Exclusion of gains from qualified small business stock (QSBS)
An individual calculates their AMT using Form 6251 (Alternative Minimum Tax for Individuals) and reports the AMT, if any, on Schedule 2 (Additional Taxes).
AMT Adjustment for Private Activity Bonds
Individual taxpayers who receive municipal bond interest income can generally exclude the interest from their federal income tax calculation.1 However, depending on the taxpayer’s residency, the interest may be subject to state income taxes.
Some municipal bond interest may constitute private activity bond (PAB) interest. Private activity bond interest is still exempt from regular federal income taxes; however, taxpayers cannot exclude the PAB income from calculating alternative minimum taxable income.2
If a taxpayer has a substantial amount of private activity bond interest that is exempt from regular federal income taxes, adding back those amounts for AMT purposes may result in an AMT liability.
Please view our video tutorial on how to complete Form 6251 for private activity bond interest adjustments.
Credit for Prior Year Minimum Taxes – Form 8801
If an individual taxpayer pays AMT in a given tax year, they may be able to use some or all of that tax paid as a credit in subsequent tax periods. Individuals should calculate their current year AMT credit and carryforward on Form 8801 (Credit for Prior Year Minimum Tax).
More Information on AMT Adjustments
Taxpayers can find more information regarding the AMT and its various adjustments by reviewing the Form 6251 instructions and the IRS website.