Per Code Sec. 56, in calculating alternative minimum taxable income (AMTI), a taxpayer must add or subtract amounts from regular taxable income due to the different treatment of certain tax items for AMT. These additions and subtractions are called AMT adjustments.
NOTE: Individual taxpayers in some cases must also increase regular taxable income in some cases due to the different treatment of certain other tax items for AMT purposes under Code Sec. 57. These increases, called AMT preferences, are discussed on the AMT Preferences page.
Some of the adjustment items are very common, while others only affect a small number of individual taxpayers. The items that are subject to adjustment for AMT for individual taxpayers include:
An individual taxpayer’s AMT adjustment items are added or subtracted in the calculation of AMTI on page 1 of Form 6251. These adjustments are discussed below.
NOTE: All line references below are to the 2014 Form 6251. They will be updated for 2015 when the 2015 form is available.
Limitation on Overall Itemized Deductions
The overall limitation on itemized deductions, reinstated in 2013, is an
adjustment for AMT on Form 6251, line 6.
Miscellaneous Itemized Deductions
For AMT, an individual taxpayer cannot deduct miscellaneous itemized deductions subject to the 2% of AGI floor (as defined in Code Sec. 67(b)). Therefore, an individual taxpayer must add back these deductions in calculating AMTI. The miscellaneous itemized deductions subject to the 2% of AGI floor include (but are not limited to):
- Unreimbursed employee business expenses. Tax return preparation fees. Expenses paid to collect or produce taxable income or to manage or protect property held to earn taxable income.
An individual taxpayer reports the AMT adjustment amount for these items
(the amount from line 27 of Schedule A, Form 1040) on Form 6251, line 5.
State, Local, and Foreign Taxes
No deduction is allowed in calculating AMTI for the taxes listed in Code Secs. 164(a) and 164(b)(5)(A). Therefore, an individual taxpayer must add back deductions for these taxes in calculating AMTI. These taxes include:
- State, local, and foreign income, war profits, and excise taxes. State, local, and foreign real property taxes. State and local personal property taxes. State, local, and foreign taxes paid or accrued in carrying on a trade or business or an activity for the production of income. State and local sales taxes deducted in lieu of income taxes.
An individual taxpayer reports the AMT adjustment amount for these items
(line 9 of Schedule A, Form 1040) on Form 6251, line 3.
Standard Deduction and Personal Exemptions
The basic and additional standard deduction and the deduction for personal
exemptions are not allowed for AMT. Because the calculation of AMTI starts
with adjusted gross income (AGI) for individual taxpayers taking the standard deduction (AGI less itemized deductions for taxpayers who itemize), no entry is necessary on Form 6251 to take into account the adjustments for the standard deduction and the personal exemption.
NOTE: The disaster loss deduction under Code Sec. 63(c)(1)(D) and the motor vehicle sales tax deduction under Code Sec. 63(c)(1)(E), which are part of the overall standard deduction, are allowed for AMT.
Medical and dental expenses are deductible in calculating AMTI to the extent that they exceed 10% of AGI. For years before 2013, they are deductible for regular tax purposes to the extent that they exceed 7.5% of AGI and the difference between the deductions for AMT and regular tax (which for practical purposes is the lesser of the amount on line 9 of Schedule A, Form 1040, and 2.5% of the amount on line 38, Form 1040) must be added in calculating AMTI on Form 6251, line 2.
For 2013 and later years, the deduction will be the same for regular tax and AMT, so no adjustment will generally be necessary. However, in 2013 through 2016, a transitional rule in Code Section 213(f) allows taxpayers 65 years and older to continue deducting medical and dental expenses in excess of 7.5% of AGI for regular tax purposes. However, this rule will not apply in determining the AMT deduction. Therefore, taxpayers affected by Code Section 213(f) will have an AMT adjustment for medical and dental expenses in those years.
Mortgage interest: The rules for deducting mortgage interest are more restrictive for AMT than for regular tax. If a taxpayer can deduct more mortgage interest for regular tax than for AMT, the difference is an adjustment that the taxpayer adds back in calculating AMTI.
For the regular tax, individual taxpayers can deduct interest on a mortgage loan that the taxpayer used to purchase a qualified residence (i.e. the taxpayer’s principal residence and one other residence selected by the taxpayer that the taxpayer uses as a personal residence) or refinance an existing loan that was used to purchase a qualified residence, to the extent the refinancing loan does not exceed the original mortgage loan. The taxpayer may also deduct interest on a home equity loan or line of credit. For the AMT, an individual may only deduct interest on a mortgage loan used in acquiring, constructing, or substantially improving a principal residence or qualified dwelling.
NOTE: Because of the “acquiring, constructing, or substantially improving” rule, and the lack of an AMT provision for deducting home equity interest, interest on a home equity loan or line of credit will not be deductible for AMT if a taxpayer uses the proceeds from the loan or line of credit for purposes unrelated to the home.
For the regular tax, a qualified residence (in the case of the taxpayer’s principal residence and an elected second residence) includes a house, mobile home, condominium, houseboat, house trailer, and stock held by a tenant- stockholder in a cooperative housing corporation. For AMT, this is also the case for the taxpayer’s principal residence. However, for AMT purposes, the second residence can only be a home, apartment, condominium, or a mobile home not used on a transient basis.
An individual taxpayer adds back the amount of the adjustment for mortgage interest in calculating AMTI on Form 6251, line 4.
EXAMPLE: T owns a home and a boat that qualifies as a residence for purposes of the regular tax mortgage interest deduction. T has an original mortgage loan used to purchase the home, a home equity line of credit on the home that he has used solely to
pay for several vacations, and a loan secured by the boat that he used to purchase the boat. For regular tax purposes, T will be able to deduct the interest on all three of these loans. For AMT purposes, he will only be able to deduct the interest on the original home mortgage loan. T must add back the interest on the home equity line of credit and the boat loan in calculating his AMTI.
Investment interest: For regular tax purposes, an individual taxpayer can deduct investment interest to the extent of his or her net investment income. A taxpayer also can deduct investment interest to the extent of net investment income for AMT purposes, but the taxpayer must take AMT adjustment and preference items and the AMT loss disallowances under Code Sec. 58 into account in determining the amount of investment interest expense that is deductible in computing AMTI. Investment interest that a taxpayer cannot deduct in the current year due to the net investment income limitation can be carried forward and deducted (subject to the limitation) in the next tax year. The difference between the regular tax deduction for investment interest and the AMT deduction for investment interest is an AMT adjustment that is included on Form 6251, Line 8.
Interest on a mortgage loan that is deductible under the AMT rules for home mortgage interest described above is not investment interest. However, where the taxpayer uses the proceeds of a mortgage loan to purchase investment property, the interest on the loan is deductible investment interest for AMT purposes if it is not deductible under the home mortgage interest rules.
Interest on borrowed funds used to purchase private activity bonds are investment interest for AMT because the interest from private activity bonds is included in AMTI. Likewise, the interest on private activity bonds is included in investment income.
Incentive Stock Options
For regular tax, under Code Section 421, a taxpayer that exercises an incentive stock option is not required to include the difference between the option price and the fair market value of the underlying stock at the time of exercise in income in the year of exercise. For AMT, this difference must be included in income in the year of exercise. Thus, the amount of the difference is an AMT adjustment added back in calculating AMTI on Form 6251, line 14.
NOTE: This adjustment does not apply if the taxpayer sells the stock received in the ISO exercise in the same tax year he or she exercises the ISO.
EXAMPLE: R exercises 100 ISOs in 2015 when the FMV of the stock underlying the options is $10 per share. R pays $5 per share when she exercises the ISOs. R does not recognize any income for regular tax in 2015 due to the exercise of the ISOs. In calculating AMTI, R must add back $500, the difference between the amount when she exercised the ISOs and the FMV of the stock she receives.
For AMT purposes, a taxpayer adds the amount of the adjustment to the basis of the stock.
EXAMPLE: The facts are the same as in the preceding example. R has a regular tax basis of $500 in the stock she receives when she exercises the ISOs, the price she paid to exercise the options. Her AMT basis in the stock is $1000, the price she paid to exercise the options plus the amount of her AMT adjustment.
The difference in basis caused by the ISO adjustment will usually cause an AMT adjustment on the disposition of the stock in the year the stock is sold. The AMT adjustment for the disposition of property is discussed below.
In general, unless a taxpayer elects to use the same method of calculating depreciation for regular tax and AMT on post- 1986 assets, depreciation is calculated differently for regular tax and for AMT on those assets. In most cases, the differences in the depreciation rules for the two systems results in a greater depreciation deduction for a particular asset for regular tax in the earlier years of the asset’s recovery period and a lower deduction for regular tax in the later years. The difference between the aggregate amount of depreciation deductions for regular tax and for AMT is an adjustment that is added back or subtracted in the calculation of AMTI on Form 6251, line 18.
NOTE: See the instructions for Form 6251, under the heading “Post- 1986 Depreciation” for more information on the specific differences in the calculation of regular tax and AMT depreciation.
For a taxpayer that owns an interest in a partnership or shares in an S corporation, the K- 1 the taxpayer receives from the partnership or S corporation frequently includes a passthrough of an AMT depreciation adjustment amount. On a partnership K- 1, the adjustment is reported on line 17 (Code A). On an S corporation K- 1, the adjustment is reported on line 15 (Code A).
Disposition of Property
The gain or loss recognized on the disposition of property may be different for regular tax and AMT because the property the taxpayer disposes of has a different basis for regular tax and AMT. This can occur for a number of reasons, including differences in depreciation deductions taken under the two systems for the property and in the case of stock received through the exercise of an ISO, the difference in basis caused by the ISO AMT adjustment discussed above. Because basis may be higher or lower for regular tax than it is for AMT, this adjustment may be positive or negative. The taxpayer includes the adjustment in calculating AMTI on Form 6251, line 17.
NOTE: It is important to remember that the $3,000 limitation on the deduction of capital losses that applies to individual taxpayers for regular tax also applies for AMT.
Alternative Tax Net Operating Losses, Amortization Expenses of Pollution Control Facilities, Circulation Costs, Long- Term Contract Expenses, Mining Costs, Research and Experimental Costs
Except for adjustments passed through from partnerships, LLCs, and S corporations, these are all comparatively rare adjustments for individuals. More detail on these adjustments can be found in the instructions for Form 6251.
NOTE: If you own a sole proprietorship business and report any of these types of expenses on Schedule C, you should generally consult with a qualified tax professional when determining the amount of the AMT adjustment.
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