Alternative Minimum Tax Thresholds

Why This Matters

The Alternative Minimum Tax exists as a parallel tax system designed to ensure that high-income taxpayers can't use too many deductions and preferences to avoid paying their fair share. For your Federal Income Tax Accounting exam, you're being tested on your ability to navigate the interplay between the regular tax system and AMT—understanding when AMT kicks in, how exemptions phase out, and how the two-tier rate structure applies. These concepts test your mastery of threshold mechanics, phase-out calculations, and entity-specific rules.

The AMT isn't just about memorizing numbers; it's about understanding how Congress built a backstop into the tax code. You need to know how exemption amounts protect lower-income taxpayers, why phase-outs gradually eliminate that protection, and how the 26%/28% rate structure creates a progressive element within AMT itself. Don't just memorize the thresholds—know what concept each threshold illustrates and how the pieces fit together in a complete AMT calculation.

---

Exemption Amounts: The First Line of Protection

The AMT exemption functions like a standard deduction specifically for AMT purposes—it shields a base amount of Alternative Minimum Taxable Income (AMTI) from the AMT calculation entirely. These amounts vary by filing status to account for different household structures and are adjusted annually for inflation.

AMT Exemption for Single Filers and Heads of Household

• $\$81,300$ exemption amount (2023)—this figure reduces AMTI dollar-for-dollar before AMT rates apply
• Identical treatment for single filers and heads of household, unlike regular tax brackets where HOH receives more favorable treatment
• Inflation-adjusted annually—expect exam questions to provide the current year's figure or test your understanding of the adjustment mechanism

AMT Exemption for Married Filing Jointly

• $\$126,500$ exemption amount (2023)—approximately 1.56 times the single filer exemption, not double
• Marriage bonus effect—MFJ couples receive more than twice what married filing separately taxpayers would get combined
• Strategic planning opportunity—high-income couples should calculate whether AMT exemption benefits outweigh other MFS advantages

---

Phase-Out Mechanics: When Exemptions Disappear

The AMT exemption doesn't apply equally to all taxpayers. Congress designed a phase-out mechanism that gradually eliminates the exemption for higher-income taxpayers. The phase-out rate of 25% creates an effective marginal rate increase in the phase-out range.

Phase-Out Threshold for Single Filers

• Phase-out begins at $\$578,150$ AMTI—below this amount, the full $\$81,300$ exemption applies
• 25-cent reduction per dollar of AMTI above the threshold, meaning the exemption disappears entirely at $\$903,350$ AMTI
• Effective marginal rate increase—during phase-out, taxpayers face an additional 6.5% effective rate (26% × 25%) on top of the stated AMT rate

Phase-Out Threshold for Married Filing Jointly

• Phase-out begins at $\$1,156,300$ AMTI—exactly double the single filer threshold
• Complete phase-out occurs at $\$1,662,300$ AMTI—calculated as threshold plus (exemption ÷ 0.25)
• Planning window—taxpayers in the phase-out range face the highest effective AMT rates and should prioritize timing strategies

---

Rate Structure: The Two-Tier AMT System

Unlike the regular tax system's multiple brackets, AMT uses only two rates. This simplified structure still creates progressivity, with higher-income taxpayers paying the 28% rate on income above specified thresholds.

The 26% AMT Rate Bracket

• Applies to first $\$199,900$ of AMTI (MFJ) or $\$99,950$ (single)—after subtracting the exemption amount
• Lower rate by design—Congress set this rate to minimize AMT impact on taxpayers just above the exemption threshold
• Calculation sequence matters—apply exemption first, then rates to the remaining AMTI

The 28% AMT Rate Bracket

• Applies to AMTI exceeding $\$199,900$ (MFJ) or $\$99,950$ (single)—only 2 percentage points higher than the lower bracket
• Breakpoint is exactly double for MFJ—unlike exemptions, the rate threshold maintains perfect 2:1 ratio
• Interaction with phase-out—taxpayers in both the phase-out range and 28% bracket face the highest effective AMT burden

---

AMTI Calculation: Building the Tax Base

Understanding what goes into Alternative Minimum Taxable Income is essential for determining whether AMT applies. AMTI starts with regular taxable income and adds back "preference items" and "adjustments" that Congress deemed too generous.

Alternative Minimum Taxable Income (AMTI) Computation

• Starting point is regular taxable income—then add back state and local tax (SALT) deductions, which are completely disallowed for AMT
• Key adjustments include miscellaneous itemized deductions, certain depreciation differences, and incentive stock option spreads
• Personal exemptions historically added back—though currently suspended under TCJA, this concept remains testable for understanding AMT mechanics

---

Corporate AMT: Different Rules for Business Entities

The AMT applies differently to corporations, with distinct thresholds and calculation methods. The corporate AMT was repealed by TCJA but reinstated by the Inflation Reduction Act of 2022 for very large corporations.

Corporate AMT Gross Receipts Threshold

• $\$7.5$ million average annual gross receipts—measured over the preceding three tax years
• Applies to C corporations only—pass-through entities like S corps and partnerships are not subject to corporate AMT
• First-year corporations exempt—the three-year testing period means new corporations get initial relief

Small Corporation Exemption

• Corporations at or below $\$7.5$ million threshold are fully exempt—no AMT calculation required
• Once exceeded, exemption is lost permanently—even if receipts later fall below the threshold
• Gross receipts test is cumulative—includes all revenue, not just taxable income

---

Special Limitations: NOLs and Credits

Certain tax benefits have special limitations when applied in the AMT context. These rules prevent taxpayers from using losses and credits to completely eliminate AMT liability.

AMT Net Operating Loss Deduction Limit

• 80% of AMTI limitation—NOLs cannot offset more than 80% of AMTI in any given year
• Separate NOL calculation required—AMT NOL may differ from regular tax NOL due to preference item adjustments
• Carryforward permitted—unused AMT NOL carries forward under rules similar to regular NOL provisions

AMT Credit Carryforward

• No time limit on carryforward—AMT credits can be carried forward indefinitely until fully utilized
• Offsets regular tax liability only—the credit reduces regular tax in years when regular tax exceeds tentative minimum tax
• Deferral item credits only—credits arise from timing differences (like depreciation), not permanent exclusion items

Adjusted Current Earnings (ACE) Adjustment

• 75% of ACE difference added to AMTI—when ACE exceeds pre-adjustment AMTI
• Includes tax-exempt interest and life insurance proceeds—items excluded from regular taxable income
• Can be negative—if pre-adjustment AMTI exceeds ACE, a negative adjustment (limited to prior positive adjustments) applies

---

Quick Reference Table

---

Self-Check Questions

1. A single taxpayer has AMTI of $\$700,000$. Calculate their remaining AMT exemption after the phase-out reduction. What effective marginal rate do they face in the phase-out range?

2. Compare the AMT exemption phase-out threshold ratio (MFJ vs. single) to the exemption amount ratio. Why might this difference create planning opportunities for married couples?

3. Which two AMT concepts—the exemption phase-out or the two-tier rate structure—contributes more to AMT's progressivity? Explain your reasoning using specific thresholds.

4. A corporation had gross receipts of $\$6$ million, $\$8$ million, and $\$9$ million over the past three years. Is it subject to corporate AMT? What if next year's receipts drop to $\$5$ million?

5. Compare the treatment of NOL deductions under AMT (80% limitation) with AMT credit carryforwards (unlimited duration). In what scenario would a tax advisor prioritize generating AMT credits over preserving NOL deductions?