What is the alternative minimum tax? And is it something taxpayers should be concerned about when filing their tax returns?
Retirement Daily’s Robert Powell caught up with Jeffrey Levine, CPA and tax pro from Buckingham Strategic Wealth Partners, to answer that question and more.
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Quotes| The Alternative Minimum Tax Explained Jeffrey Levine, Chief Planning Officer, Buckingham Strategic Wealth Jeffrey Levine, Chief Planning Officer, Buckingham Strategic WealthRecommended Read: Incentive Stock Options
Video Transcript| Jeffrey Levine, CPA and Tax Expert, Buckingham Strategic WealthRobert Powell: What do you need to know about the alternative minimum tax? Well here to talk taxes with us is Jeffrey Levine from Buckingham Wealth Partners. Jeffrey, what do folks need to know about AMT?
Jeffrey Levine: Well, I think the biggest thing that folks need to know about AMT today is that very few individuals actually have to pay it. Now, for those wondering what even is AMT? I’ve never heard of this alternative minimum tax thing. Well, it’s effectively what I like to think of as a shadow tax system. So when you do your taxes, you are really actually doing two tax returns. You’re doing a regular tax return and then an alternative minimum tax return. And effectively the alternative minimum tax return just starts with your regular return and then says, under this separate system, don’t allow these deductions. Instead of this change, have it be this. It’s a separate set of rules. And then you ultimately end up paying the higher of those two tax bills.
Well, why is it that so few people pay that alternative minimum tax today? Simply, changes made by the Tax Cuts and Jobs Act largely eliminated the alternative minimum tax for most individuals for a variety of reasons. One is they increased the exemption amount. They also increased the phase-out range where that exemption begins to go away. And perhaps, one of the biggest culprits, if you will, of causing AMT, which was high state and local income taxes, that was significantly curtailed because of our current $10,000 cap on state and local tax deductions.
Now, the final thing that people should know, though, is just because you don’t pay it today doesn’t mean you won’t pay it forever. Because if things don’t change or don’t get extended before then, beginning in 2026, we go back to the previous rules and many more individuals will find themselves subject to the alternative minimum tax at that time.
Robert Powell: All right. So let’s say, for example, you file your tax return. You don’t know that you were subject to AMT, but you were. What happens then?
Jeffrey Levine: Well, you pay the higher bill. That’s it. You always pay more. So if your AMT bill is higher than your regular tax, you pay AMT. If your regular tax is higher than the AMT, you pay the regular tax. And in some circumstances, the difference will be a permanent difference. In other words, the AMT rules will say this is the rule for this particular deduction. You just don’t get it, in which case you never kind of recover those dollars. There are also some differences between AMT and regular tax in terms of the timing of when you pay the tax on certain things. And in those situations what you may end up with is an alternative minimum tax credit that can actually reduce your future tax liability in future years. So it’s worth keeping track of there.
And if you’re wondering, you said, Jeff, I’m unlikely to pay that AMT today. What’s the most likely trigger? The most likely trigger is those who have exercised, let’s say, incentive stock options, right? Incentive stock options or who receive those incentive stock options are, in most instances today, the biggest trigger of alternative minimum tax. Not the only one, but if you have ISOs, incentive stock options, the alternative minimum tax is something that still has to be high on your radar.
Editor’s Note: The content was reviewed for tax accuracy by a TurboTax CPA expert.
Zach Faulds contributed to the writing of this article and produced the video and/or the graphics associated with it.