Let us take you through a history lesson. In 1969, Congress realized that 155 high-income individuals were legally using so many deductions and other tax breaks that they were paying absolutely nothing in federal income taxes. Such nonexistent tax bills were an embarrassment.
So, Congress came up with the AMT in order to make a tax system that’s actually fair. But because the AMT was never indexed for inflation-whereas the regular income tax is indexed to inflation-the exemption amounts have risen only when Congress has intervened explicitly to raise them, and consequently, even more taxpayers, who were not initially targeted, get caught in a tax that was intended to hit the rich.
The alternative minimum tax, or AMT for short, is a tax system that is parallel to the regular tax system but its tax rate applied in its systems differs from that of the regular tax system. It is tax which plays an important check wherein high-income earners do have to pay their fair share of federal income taxes. If your income is over the exemption amount for AMT, you owe both ordinary income tax and AMT since the amount paid under each would be higher. AMT exemption amounts are now indexed to rise with inflation.
Now that you’ve heard the origin story of AMT, let’s move on.
Here’s a general overview of the steps to calculate the AMT:
1: Determine your alternative minimum taxable income, which typically is an adjustment to regular taxable income, adding back certain preferences and itemized deductions. Subtract from your AMTI, the AMT exemption amounts, which phase out at higher levels of income.
2: Apply to the above resulting income the applicable AMT tax rate(s), to determine your tentative minimum tax (TMT).
3: Your AMT liability is the difference between this minimum amount and your regular tax liability.
In other words, you have to pay the minimum as calculated by the AMT calculation if your AMT liability exceeds your regular tax liability. It ensures that you pay at least a certain share of taxes-unconditional about how high the deductions or credits would be.
Earnings and tax credits that would have otherwise been omitted or subtracted in the computation of the normal taxes payable are added back to your income under AMT.
Income exempt under AMT like that from incentive stock options exercised, refund received on state and local income taxes paid end up on computations under AMT. The alternative minimum tax of $88,100 for single filers, $137,000 for married-filing-jointly, or $68,500 for married-filing-separately in 2025 will be paid at their filing time by those taxpayers who earned income above such exemption level for tax year 2026. AMT tax rates are 26% or 28%. What is IRS Form 6251? Better known as the Alternative Minimum Tax-Individuals, IRS Form 6251 is the tax form the Internal Revenue Service designs to compute the amount of such potentials AMT that a taxpayer must pay. This just resulted from people who earn high incomes from taking advantage of allowable deductions in order to bring down their taxes. The AMT serves like an insurance policy because it caps these tax benefits so that those who earn more have a share of taxes.
This functions to maximize the balance in taxation; it constrains negative deductions and promotes the fair aspect of taxation. Consequently, if you fall into the taxpayer group to which AMT applies then you are liable for taxation according to the AMT and not in relation to the individual tax return standard deduction. Now you would ask, who should file the form 6251. We got an answer to that as well. It is subject to specific income thresholds and other criteria. So, so far, for tax year 2024, this is what the Internal Revenue Services (IRS) says: AMT Guidelines:
- For taxpayers filing individually, the AMT exemption is $85,700. Meanwhile, married couples filing their taxes jointly are eligible for an AMT exemption of $133,300.
- On income up to $232,600 for singles and $116,300 for joint filers, the 26% AMT tax rate applies to Alternative Minimum Taxable Income.
- Above these amounts, a 28% AMT tax rate applies.
- The AMT exemption phases out when AMTI equals $609,350-for all filing statuses.
Can you avoid the AMT?
Its goal was to ensure that high-income taxpayers don’t end up paying less than their fair share of taxes. So you cannot avoid it so easily. But if you do have that concern then just try to avoid the types of income, deduction and credit that would trigger the AMT.
Very few of these “red flag” items will be known to the average taxpayer, but some common ones include:
1: High gross income in relation to tax on income
2: Exemption from taxes on private activity bonds
3: Stock option incentives
4: Capital gains after long-term investments
Does the alternative minimum tax apply to individuals?
Alternative Minimum Tax was originally designed to ensure that high-income earners, corporations, estates, and trusts pay at least a minimum amount of tax irrespective of the magnitude of deductions, credits, and exemptions.
It also applies to individuals if their AMT liability exceeds their regular tax liability. The AMT tax rate is 26% on the first $206,100 of alternative minimum taxable income ($103,050 if married filing separately) and 28% on any amount over that.
Following are some key things to know about who must file Form 6251 for the individual AMT:
You are always required to file Form 6251 if you have more nonrefundable personal credits than you have regular tax minus your tentative minimum tax. Common nonrefundable credits include the child tax credit, credit for child and dependent care expenses, and education credits.
You must file if you exercised some incentive stock options during the year.
You also need to file if you have high state or local income taxes, home equity loan interest, and/or miscellaneous itemized deductions.
The AMT exemption for tax year 2023 is $81,300 for single filers and $126,500 for joint filers. Exemptions phase out at higher income levels.
So, higher earners may also come under the AMT if they opt for tax credits, deductions, or any other favoritism. So, they are liable to calculate their liability on Form 6251. The AMT is meant to ensure that these taxpayers pay at least a minimum amount of federal income tax.
Factors Affecting the Alternative Minimum Tax
There are various factors that go into calculating AMT, usually determining if you will pay this type of tax and how much you owe. So here are the factors you report on Form 6251 that go into determining your tax liability at the end of the day:.
1: Income: The AMT is greatly impacted by your level of income. There are threshold levels for your income (as mentioned above) beyond which you would have to calculate your tax liability under the AMT as well as under the regular system of taxes. You would then have to pay the higher of these two amounts as tax.
2: Filing Status: Besides that, your filing status-for instance, single, married, filing jointly, head of household, etc.-affects the computation of the AMT. According to the IRS, there is a different exemption amount for different filing statuses and it is easily found in Form 6251.
3: Adjustments: Some of the itemized adjustments you report on your regular return cannot be deducted or are limited when you compute AMT.
Examples of these are state and local income taxes, interest on home equity loans for personal, family, or household purposes among others, and certain depreciation methods.
The changes are specified on Form 6251. Think of it, for example, that any deductions that decrease your regular tax liability may leave you stuck in AMT limbo.
4: The Type of Income: The following types of income pull subjects into the tax bracket of AMT, such as interest income from certain private activity municipal bonds. Such income types are added back to your taxable income while calculating the AMT, which in turn increases your tax liability. Steps in Calculating the AMT There are a few critical steps in computing the AMT, which is, of course, one or two steps further than your average tax return. All of these steps entail a series of calculations to ascertain the level of AMT liability. Each should also make adjustments for items. The steps are discussed below:
First, you calculate your taxable income.
As you know, taxable income is gross income minus either the standard deduction or itemized deductions and exemptions on your regular tax return.
So your starting point for AMT calculations becomes regular-taxable income.
So keep all that data in hand because without it you cannot go on to the next step. Apply all the required AMT adjustments to your taxable income. Don’t forget to add back any standard deduction claimed. Step two is subtract the AMT exemption amount from your adjusted gross income. The exemption will decline for those who have higher incomes above particular thresholds. Be sure to use the correct exemption amount depending on the filing status. Now we go to step 3. After subtracting your AMT exemption amount, what you are left with is your alternative minimum taxable income. This you will use in computation for your tentative minimum tax. Now that you have your AMT, the thing next in line is to apply your AMT rates to it. And just in case you know, for tax year 2023, the rates are 26% and 28%, depending on how high your AMTI is. For example, the 26% tax rate is applied to the AMTI of a single filer up to $220,700, and the 28% tax rate is applied on AMTI above that. The 26% tax rate applies to AMTI up to $110,350 for married couples who file separately, and the 28% tax rate applies on AMTI above this amount.
Compare it with your regular tax liability. If the TMT happens to be greater than your regular tax liability, then the amount of AMT payable by you is simply the difference between TMT and your regular tax liability.
Form 6251 is the form for alternative minimum tax computation. Prepare it, which will be used to formalize the computation and reporting of your AMT. It shows the AMT adjustments, taxable income, exemption in AMT, and the available credit if there is one to calculate your tax liability.
Use Form 6251 Calculator and Tools
There are several online calculators you can use to estimate your AMT liability on Form 6251. The IRS has its own simple AMT Assistant tool you can use, which checks whether your return may be affected by AMT.
When you operate these estimators, make sure you know your regular tax liability, as well as your adjustment and preference amounts. The AMT estimates guide you through a streamlined Form 6251. You then compare your tentative minimum tax with your regular tax liability. If an estimate indicates that you owe AMT, complete Form 6251 in its entirety with your tax return.
The site provides the newest edition of the official IRS Form 6251 in PDF. This makes it easy to fill the form out when you download the PDF because you can save a copy to your computer. For the saved PDF, you fill it out by typing into the form fields or print it and then you write in it by hand.
Refer to step-by-step instructions and take care in completing each line. If you are married and you file separately, adjustments and preferences amounts will be divided. Make sure to double-check your figures before submission with submission of your tax return.
Reading the IRS Instructions for Form 6251 closely helps avoid errors. It contains worksheets and line-by-line guidance, which are both defined in detail with explanations.
Special attention is paid to who must file sections, tax law changes that affect this form, which items of income are adjustments/preferences, computing AMT, and credits that can reduce AMT. It is easier to fill out Form 6251 with a good understanding of the instructions.
