AlternativeMinimum Tax (AMT) is the type of tax that is calculated apart fromregular tax to ensure that high-income earner, corporate and trustpay at least a fair value. The AMT is calculated by considering someadjustments and preferences. IRS stipulates that one is liable forAMT if the Tentative Minimum Tax is bigger than the regular tax. Thus, AMT is the excess tax you pay on top regular income tax. AMT iscomputed as follows: Taxable income –(+) adjustments + preferences= Alternative minimum taxable income –exemptions =Alternativeminimum tax base ×26% or 28%= tentative minimum tax- AMT foreign taxcredit = Tentative Minimum Tax(TMT)-regular tax=AMT if TMT is greaterthan regular tax liability.
Whencalculating AM, various preferences and adjustments are maderegarding individuals or organization. Adjustments are either addedor deducted depending on their nature while preference is alwaysadded. For property placed in use after 1998, modified acceleratedcost recovery system (MACRS) on straight line method is used incalculating AMT while for property that was put to service between1986 and before 1999 6th January alternative depreciation system of astraight line is used for over 40 years. If the amount obtained fromthe calculation is greater than the regular tax liability, then it isreflected as a negative entry. Regarding amortization, certifiedpollution control facilities that were in use before 1999, there isamortization for the purpose AMT, the use of straight-linedepreciation method is used for the facility class life.
Forfacilities that came to be used after 1998, AMT is calculated underMACRS by using the straight line method, if the figure exceedsregular tax it is entered as a negative figure. Adjustments in themining exploration and development costs are amortized for ten yearsfor the purpose of AMT if not capitalized for regular tax purposes ifthe amounts are greater than regular tax liability the figure iscaptured as a negative amount. For circular expenditure for thepurpose of AMT the expenditures are capitalized and amortized over aperiod of 3 years. For AMT purpose, it is required that corporationsuse a percentage of completion method to define the-the taxableincome derived from a long-term contract. If the income from thelong-term contract is small compared to regular tax the difference iscaptured as a negative.
Theexercise Incentive stocks options can result to income for AMTpurpose that is not liable currently to tax for the regular tax. Theaddition in Fair market value over exercise price is adjusted in thetaxable annum in which the option is exercised. Adjusted basis foran asset can be different for AMT and regular tax. Thus loss or gainfrom disposal of asset vary for the two tax systems. The differencefrom the two tax system is the adjustment. Passive activity loss isnot deductible when computing regular tax and AMT. Net operating lossare computed using AMT Provisions. There itemized deductions that areallowed for the purpose of computing AMT, they include gamblinglosses, causality losses, charitable contributions, estate taxattributable to IRD, qualified interest and medical spending inexcess of 10% AGI. There also itemized deduction that are notconsidered in AMT for example miscellaneous and tax subject to the 2%AGI limit.
Preferenceis percentage depletion amount taken for regular tax that is inexcess of the amount adjusted of a property in the end of year. Ariseas result of deductions that provide substantial income benefits,they only increase AMT thus they are positive. Tax preferences arecomposed of excess IDC,7% income from exclusion of gross income gainon sale of small business stock and interest on private bond activity . Preference Amount for intangible drilling cost (IDC) are treatedas follows, IDC expenses incurred in a year-amortized and capitalisedIDC over ten years=additional IDC expenses over amortization-65%net geothermal, gas and oil income=Tax preference item. Interest forprivate bonds is not taxed for regular tax liability but is added inincome for AMT purposes. 7% of amount excluded from gain of onselling small business stock is a tax preference for AMT. AMT creditis AMT as result of timing difference, is used to offset regularincome tax liability when carried forward.
Thereother factors that are considered when computing for AMT, Exemptionamounts, this refers to the income that is not liable for AMT. Forinstance the income will not be subject to AMT, $53600 for singles,$84400 for married couples filled jointly and 41700 for married,filled separately. To avoid AMT one can always overpay to always keepthe tax deduction as low as possible. Also someone can pay propertytaxes as the fall due thus keeping deduction and taxes low. It isadvisable to sell stock option the year that they are exercised toavoid AMT, you will only be liable for regular tax.
Instructionsfor Form 6251 (2014). (n.d.). Retrieved from