What are some of the common tax breaks disallowed under AMT?

AMT is a completely separate method of calculating personal income taxes from the regular federal income tax. The standard tax deductions and credits commonly used in calculating the regular tax completely disappear or are significantly changed under AMT.

If your AMT tax is higher than your tax calculated under the regular calculation, you pay the higher AMT amount.

One of the reasons for that is that under AMT everyone gets a very large tax deduction, right off the bat.  With the passage of the Tax Cuts and Jobs Act of 2017,  the AMT exemption amounts were dramatically increased for tax years 2018 through 2025 (beginning 2026, they revert to pre-2018 levels). The 2018 exemption amounts are $70,300 for single filers and $109,400 for married taxpayers filing a joint return. Additionally, the income levels at which the exemption amounts begin to phase out are increased.

The AMT exemption amounts are preset and adjusted for inflation.

The following items are disallowed completely under AMT:

–Standard Deduction
–Personal Exemptions
–State and Local Taxes
–Property Taxes
—Miscellaneous Itemized Deductions

Treatment of income items under AMT

The following items have significant changes in how they are treated under AMT:

1. Medical expense deductions are still available; however instead of only being able to deduct the amount of expense that is more than 7.5% of your AGI (Adjusted Gross Income), that percentages raises to 10% of your AGI.

2. Tax Exempt Interest: This can be exempt  or can become taxable under AMT.  There is a very complicated set of rules that determines whether or not it remains excludable under AMT.

3. NOLs (Net Operating Loss Carry Forwards) are adjusted under another complicated formula.  As a general rule, if your NOL calculation for regular tax purposes has an item that is modified by the AMT, then the AMT NOL will be different.  See the instructions for Form 6251

4. Depreciation: AMT deprecation deduction differs from the amount allowed for regular tax purposes, due to the different basis rules. AMT uses Straight Line Depreciation.  Bonus Depreciation is disallowed and the more common form of depreciation, MACRS, is disallowed as well as all other non- straight line methods.  Straight Line Depreciation still applies over the standard useful lifetime of the item being depreciated.

5. Percentage Depletion, Intangible drilling costs, foreign income credits and stock options are all other items that are impacted by AMT.

Case Studies: Common Tax Breaks Disallowed Under AMT

Case Study 1: Impact on Itemized Deductions

Mary, a single taxpayer, typically benefits from itemized deductions, including state and local taxes and property taxes. Under AMT, she faces a significant disallowance of these deductions, leading to a higher tax liability. Despite having substantial deductions, Mary’s AMT calculation results in a higher tax due to the limitations imposed on itemized deductions.

Case Study 2: Treatment of Tax-Exempt Interest

John, a high-income earner, holds tax-exempt municipal bonds to reduce his taxable income. However, under AMT rules, the treatment of tax-exempt interest changes, potentially leading to a portion of that income becoming taxable. John finds that his AMT liability increases as a result, reducing the tax benefits he expected from holding tax-exempt bonds.

Case Study 3: Impact on Business Depreciation

Alpha Company utilizes accelerated depreciation methods, such as bonus depreciation and MACRS, to lower its taxable income under regular tax rules. However, AMT disallows these accelerated methods and requires the company to use straight-line depreciation. Consequently, the company’s depreciation deductions are reduced under AMT, resulting in higher taxable income and a potentially increased tax liability.