The Alternative Minimum Tax (AMT) system works parallel to the ordinary income tax system. AMT works to ensure that individuals receiving investment income are paying their fair share in taxes. Alternative minimum taxes are due alongside annual income taxes and can be triggered by exercising employee stock options.
The alternative minimum tax (AMT) is an additional tax that some taxpayers have to pay if their regular income tax liability is lower than their calculated alternative minimum tax. Exercising employee stock options can create a taxable event which triggers AMT to be added to the annual taxes you owe.
If you are subject to AMT and don't create a strategy to reduce or eliminate it, your obligation becomes due when you file your return. After paying AMT alongside your tax return, you may also have to pay interest on any balance that wasn't paid during the year.
The AMT is calculated by adding up all the income, deductions, and adjustments from the tax return. That total number is then run through a formula based on your filing status and AMT rates to arrive at your tentative minimum tax. Finally, that figure is compared to what you would have owed without the AMT.
The calculation for Alternative Minimum Tax looks like this:
AMTI = [Adjusted Gross Income (AGI) - Regular Deductions] x Regular Tax Rates + Special Deductions x Alternative Tax Rate + Exemptions x Alternative Tax Rate(if applicable) + Unused Prior Year Credit (if applicable)
Although this formula is complicated, we've created free tools available within your account which help you understand your personal AMT liability.
The AMT threshold for 2022 is $199,900. The AMT rates are 26% below the AMT threshold and 28% above it.
For example, if your total AMTI = $250,000, the first $199,900 would be applied to the rate of 26%, while the remaining $50,100 would be applied to a 28% tax rate.
If this amount exceeds your regular income taxes owed, then you would pay the difference between your AMT and regular income taxes, in addition to your regular income taxes at the time of filing.
AMT exemptions are the amount of income you can earn before you are subject to the AMT. The exemption is $75,900 for unmarried individuals filing single and $118,100 for married couples filing jointly in 2022.
First, take advantage of our free tools in your account to see if it appears AMT will impact you. If you think you might be affected by AMT, talk with a compdesk advisor.
Our team can help you create a personalized strategy to mitigate or completely avoid AMT. Our experts are experienced in all aspects of tax law and can help you determine the best path forward.
AMT can be a difficult and complex tax to navigate, especially if you’re not familiar with how it works. If you need help figuring out what your AMT liability might be, or if you just want some advice on how to best prepare, get in touch with your compdesk advisor today. We can work with you to figure out exactly what steps to take when dealing with AMT.
