• Print
  • Default text size A
  • Larger text size A
  • Largest text size A

Alternative Minimum Tax (AMT)

Congress created the AMT as an alternate form of federal income taxation to ensure that wealthy individuals and corporate taxpayers pay a fair share of federal income taxes. Its reach, however, now sometimes extends beyond the wealthy.

What is the AMT?

The AMT is a tax system that works in parallel with the regular federal income tax system—while some taxpayers use the regular system, others must use the AMT system. The AMT has its own set of forms, rates, rules, and brackets, and requires taxpayers to calculate their federal income tax using this system.

The AMT was originally designed to capture a small number of wealthy taxpayers and ensure that those taxpayers were paying at least a minimum amount of tax. Unlike the regular income tax, however, the AMT is not indexed for inflation. Thus, over time, inflation makes more and more taxpayers subject to the AMT, causing it to extend to more middle-income taxpayers.

Factors that can increase the likelihood of AMT

How can I find out if I may be subject to the AMT?

There are no guaranteed tests to determine in advance if you are subject to the AMT. If you were subject to it last year and you have a similar income and tax situation this year, you will most likely be subject to it again.

The IRS maintains a calculator, the IRS AMT Assistant, to help determine if you may be subject to the AMT. Another method is to see what you might owe under the ordinary tax system and compare it to what you might owe under the AMT. The TaxCaster can help you estimate both amounts. If your AMT tax bill is higher, that's the tax you'll owe.

Certain deductions and types of income can influence whether or not you are subject to the AMT. Among the most common factors that can make an individual subject to the AMT are substantial deductions for:

  • State and local income taxes.
  • Personal exemptions.
  • Interest on second mortgages and interest on home equity loans used for purposes other than home improvement.
  • Miscellaneous itemized deductions.
  • Medical expenses.

Note that these deductions have the potential to be disallowed or treated differently under the AMT system than under the normal ordinary income tax system.

Other factors that can cause susceptibility to the AMT are:

  • Earning significant interest income (usually tax-exempt) from certain private activity municipal bonds.
  • Exercising incentive stock options that are "deep in the money" (on which gain is usually deferrable and taxed as capital gain income).

If one or more of the above factors apply to you, consider talking to your tax advisor to see if you may be able to reduce your exposure to AMT.

If you are subject to the AMT, your tax bill could be significantly higher than it would be otherwise. Your tax bill could increase under the AMT in a number of ways, including:

  • You could lose deductions for state and local taxes paid.
  • You could lose the personal exemptions for yourself, your spouse (if you are married) and any children. For 2013, the personal exemption is $3,900. Thus, a married couple with three dependent children could lose $19,500 in exemptions in 2013.
  • If you don't itemize your deductions, you could lose the ability to claim the standard deduction. For 2013, the standard deduction is $12,200 for joint filers and $6,100 for singles.
  • If you have qualified dividends and long-term capital gains, they are taxed at federal rates no higher than 15% for purposes of both the ordinary income tax and the AMT. However, the extra income could reduce or even eliminate the amount of income you can exempt from the AMT. The AMT exemption amounts for tax year 2013 are:
    • $80,800 for married couples filing jointly
    • $51,900 for single and head of household filers
    • $40,400 for married couples filing separately
    In future years these amounts will be subject to adjustments due to inflation.
  • If you have certain private activity bonds that are not exempt from the AMT, they pay a slightly higher rate of interest to compensate for the lack of exemption. Therefore, if you are subject to the AMT, you'll have to include interest from these bonds as part of your taxable income.

If you are subject to the AMT, you will need to file Form 6251 and possibly other forms, depending on the nature of your income and deductions.

Additional resources

Mutual Funds and Taxes
Understand how distributions from mutual funds are handled on your tax return.

Getting Ready for Tax Season (32:49) NEW
Watch this webinar series for tips on year-end tax planning, tax law changes, cost basis reporting, and how to use Fidelity tax resources.

1. Municipal bond funds normally seek to earn income and pay dividends that are expected to be exempt from federal income tax. If a fund investor is resident in the state of issuance of the bonds held by the fund, interest dividends may also be exempt from state and local income taxes. Such interest dividends may be subject to federal and/or state alternative minimum taxes. Investing in municipal bond funds for the purpose of generating tax-exempt income may not be appropriate for investors in all tax brackets. Interest dividends paid by Treasury bond funds are generally exempt from state income tax but are generally subject to federal income and alternative minimum taxes and may be subject to state alternative minimum taxes. Fund shareholders may also receive taxable distributions attributable to a fund's sale of municipal bonds. Fund redemptions, including exchanges, may result in a capital gain or loss for federal and/or state income tax purposes.
2. The installment sale method cannot be used for sales of securities traded on an established securities market.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

Software products are provided as a convenience to you, and Fidelity bears no responsibility for your use of, and output associated with, such products. The information and products made available to you are not intended to be, and should not be construed as, legal or tax advice or a legal opinion.
Before using this information, review important legal information and terms of use applicable to products, services, and/or information provided or accessed herein by the following companies:

The use of the TurboTax branded tax preparation software and web-based products is governed by Intuit's applicable license agreements. Intuit, the Intuit logo, TurboTax and TurboTax Online, among others, are registered trademarks and/or service marks of Intuit Inc. in the United States and other countries and are used with permission. Intuit is not affiliated with Fidelity Brokerage Services (FBS) or their affiliates. Intuit is solely responsible for the information, content and software products provided by Intuit. Fidelity cannot guarantee that the information and content supplied is accurate, complete, or timely, or that the software products provided produce accurate and/or complete results. Fidelity does not make any warranties with regard to the information, content or software products or the results obtained by their use. Fidelity disclaims any liability arising out of your use (or the results obtained from, interpretations made as a result of, or any tax position taken in reliance on information provided pursuant to, your use) of these Intuit software products or the information or content furnished by Intuit.

See Intuit’s terms of service.