AMT Adjustments
In General
Per Code Sec. 56, in calculating alternative minimum taxable income (AMTI), a taxpayer must add or subtract amounts from regular taxable income due to the different treatment of certain tax items for AMT. These additions and subtractions are called AMT adjustments.
NOTE: Individual taxpayers in some cases must also increase regular taxable income due to the different treatment of certain other tax items for AMT purposes under Code Sec. 57. These increases, called AMT preferences, are discussed on the AMT Preferences page.
Some of the adjustment items are very common, while others only affect a small number of individual taxpayers. The items that are subject to adjustment for AMT for individual taxpayers include:
- The limitation on overall itemized deductions.
- Miscellaneous itemized deductions subject to the 2% floor.
- Standard deduction and personal exemptions.
- Certain state, local and foreign taxes.
- Medical expenses.
- Certain interest (including home mortgage and investment interest).
- Incentive Stock Option (ISO) exercises
- Depreciation deduction.
- Mining exploration and development costs.
- Long-
term contract expenses. - Alternative tax net operating losses.
- Amortization deductions for pollution control facilities.
- Gain or loss on the disposition of property.
- Circulation expenses.
- Research and experimental expenses.
An individual taxpayer’s AMT adjustment items are added or subtracted in the calculation of AMTI on page 1 of Form 6251. These adjustments are discussed below.
Limitation on Overall Itemized Deductions
Years before 2018 and after 2025: For years before 2018 and after 2025, the overall limitation on itemized deductions is an adjustment for AMT. Tax payers subject to the limitation subtract the limitation amount in calculating AMTI.
Years 2018 through 2025: The 2017 Tax Cuts and Jobs Act suspended the overall limitation on itemized deductions for the years 2018 through 2025, so this adjustment is not necessary for years 2018 through 2025.
Miscellaneous Itemized Deductions
Years before 2018 and after 2025: For years before 2018 and after 2025, the deduction for miscellaneous itemized deductions subject to the 2% of AGI floor (as defined in Code Sec. 67(b)) allowed for regular tax purposes is not allowed for the AMT. Therefore, in those years, an individual taxpayer must add back miscellaneous itemized deductions in calculating AMTI. The miscellaneous itemized deductions subject to the 2% of AGI floor include (but are not limited to):
- Unreimbursed employee business expenses.
- Tax return preparation fees.
- Expenses paid to collect or produce taxable income or to manage or protect property held to earn taxable income.
Years 2018 through 2025: The 2017 Tax Cuts and Jobs Act eliminated the deduction for miscellaneous itemized deductions subject to the 2% of AGI floor (as defined in Code Sec. 67(b)) for the years 2018 through 2025. Therefore, no AMT adjustment for miscellaneous itemized deductions is necessary in those years.
State, Local, and Foreign Taxes
No deduction is allowed in calculating AMTI for the taxes listed in Code Secs. 164(a) and 164(b)(5)(A). Therefore, an individual taxpayer must add back deductions for these taxes in calculating AMTI. These taxes include:
- State, local, and foreign income, war profits, and excise taxes.
- State, local, and foreign real property taxes.
- State and local personal property taxes.
- State, local, and foreign taxes paid or accrued in carrying on a trade or business or an activity for the production of income.
- State and local sales taxes deducted in lieu of income taxes.
Standard Deduction and Personal Exemptions
Years before 2018 and after 2025: The basic and additional standard deduction and the deduction for personal exemptions are not allowed for AMT. Because the calculation of AMTI on Form 6251 starts with adjusted gross income (AGI) for individual taxpayers taking the standard deduction (AGI less itemized deductions for taxpayers who itemize), no entry is necessary on Form 6251 to take into account the adjustments for the standard deduction and the personal exemption.
The disaster loss deduction under Code Sec. 63(c)(1)(D) and the motor vehicle sales tax deduction under Code Sec. 63(c)(1)(E), which are part of the overall standard deduction, are allowed for AMT.
Years 2018 through 2025: The 2017 Tax Cuts and Jobs Act reduced the personal exemption amount to zero for the years 2018 to 2025, so no adjustment for personal exemptions is necessary in these years. However, the adjustment for the standard deduction remains in force in 2018 through 2025, and taxpayers taking the standard deduction must still add it back in calculating AMTI.
Years before 2013: Medical and dental expenses in excess of 7.5% of AGI were deductible for regular tax, but were only deductible in excess of 10% for AGI for AMT. The difference between the deduction for regular tax and for AMT was added back in calculating AMTI.
Years 2013 through 2016: For 2013 through 2016, for most taxpayers, the deduction for medical and dental expenses was subject to the same floor (10% of AGI) for regular tax and AMT, so no adjustment was generally necessary.
However, in these years, a transitional rule in Code Section 213(f) allowed taxpayers 65 years and older to continue deducting medical and dental expenses in excess of 7.5% of AGI for regular tax purposes. However, this rule did not apply in determining the AMT deduction. Therefore, taxpayers subject to the transitional rule might have an adjustment for medical and dental expenses in 2013 through 2016.
Years 2017 and 2018: Under changes made by the 2017 Tax Cuts and Jobs Act, medical and dental expenses are deductible for regular tax and AMT to the extent they exceed 7.5% of a taxpayer’s AGI. Therefore, no adjustment is necessary for medical and dental expenses for 2017 and 2018.
Years after 2018: Under the 2017 Tax Cuts and Jobs Act, the floor for the medical and dental expense deduction reverts to 10% of AGI for regular tax and AMT. Therefore, no adjustment will be necessary for medical and dental expenses for years after 2018.
Mortgage interest, in general: The rules for deducting mortgage interest are more restrictive for AMT than for regular tax. If a taxpayer can deduct more mortgage interest for regular tax than for AMT, the difference is an adjustment that the taxpayer adds back in calculating AMTI.
Mortgage interest, years before 2018 and after 2025: For the regular tax, individual taxpayers can deduct mortgage interest that is qualified residence interest (QRI). QRI is interest on acquisition indebtedness, which is debt used in acquiring, constructing or substantially improving a qualified residence that is secured by that residence. A qualified residence is the taxpayer’s principal residence and one other residence selected by the taxpayer that the taxpayer uses as a personal residence. Only the interest on up to $1 million of acquisition indebtedness is deductible. The taxpayer may also deduct interest on certain home equity indebtedness of up to $100,000.
For AMT, an individual may deduct qualified housing interest (QHI). QHI is interest which is QRI that is used in acquiring, constructing, or substantially improving a principal residence or a qualified dwelling. There is no provision that allows a separate deduction for home equity indebtedness for the AMT.
Because of the “acquiring, constructing, or substantially improving” rule, and the lack of an AMT provision for deducting home equity indebtedness interest, interest that is deductible as home equity indebtedness interest for regular tax will not be deductible for AMT if a taxpayer uses the proceeds from home equity indebtedness for purposes unrelated to the home. Therefore, if interest is deducted for regular tax on home equity indebtedness that is used for purposes other than acquiring, constructing, or substantially improving the home securing the loan, the interest deducted is an adjustment added back in calculating AMT.
In addition, an adjustment is necessary when a taxpayer claims a mortgage interest deduction for regular tax on a second home that is a qualified residence but not a “qualified dwelling.” A qualified residence (whether it is the taxpayer’s principal residence or an elected second residence) includes a house, mobile home, condominium, houseboat, house trailer, and stock held by a tenant-
EXAMPLE: In 2017, T owns a home and a boat that qualifies as a residence for purposes of the regular tax mortgage interest deduction. T has an original mortgage loan used to purchase the home, a home equity line of credit on the home that he has used solely to pay for several vacations, and a loan secured by the boat that he used to purchase the boat. The outstanding loans on his home and boat total $500,000 and the balance on the home equity line of credit is $50,000. For regular tax, T will be able to deduct the interest on all three of these loans. For AMT, he will only be able to deduct the interest on the original home mortgage loan. T must add back the interest on the home equity line of credit and the boat loan in calculating his AMTI.
Mortgage interest, years 2018 through 2025: For 2018 through 2025, due to changes made by the 2017 Tax Cuts and Jobs Act, only interest on acquisition indebtedness of $750,000 is deductible as QRI. Because this limitation amount is the same for regular tax and AMT, QRI that is deductible for regular tax will generally be deductible for AMT. However, an AMT adjustment may still be required for some taxpayers because the “qualified dwelling” requirement described above still applies in these years for the deduction of interest on a taxpayer’s second residence for AMT. If the second residence is a qualified residence but not a qualified dwelling, the interest may be QRI that is deductible for regular tax, but not QHI that is deductible for AMT. If so, an adjustment will be necessary.
Another change for years 2018 through 2025 is that the separate regular tax deduction for home equity indebtedness interest is suspended. Because of the suspension of the home equity interest deduction, interest on a home equity loan is only deductible for regular tax if the taxpayer uses the loan proceeds to buy, build, or improve a qualified residence that secures the loan. Consequently, if the interest on a home equity loan is deductible for regular tax, it is also deductible for AMT, and no AMT adjustment will be necessary for the interest.
EXAMPLE: The facts are the same as the previous example, except the year is 2022. For regular tax, T will be able to deduct the interest of the original mortgage loan for his home and the loan for his boat, but not the interest on the home equity loan because the proceeds of the loan were not used to buy, build or improve T’s qualified residence that secures the loan. For AMT, T will only be able to deduct the interest on the original home loan. T must add back the interest on the boat loan in calculating his AMTI.
Investment interest: The difference between the regular tax deduction for investment interest and the AMT deduction for investment interest is an AMT adjustment. For regular tax purposes, an individual taxpayer can deduct investment interest to the extent of his or her net investment income. A taxpayer also can deduct investment interest to the extent of net investment income for AMT purposes, but the amount deductible may be greater or smaller than the amount deductible for regular tax, because of the following differences in the AMT investment interest rules:
AMT items taken into account: In determining net investment income for AMT purposes, the taxpayer must take into account AMT adjustment items under Code Sections 56, 57 and 58, as well as the preference for interest on specified private activity bonds.
Interest on debt used to purchase specified private activity bonds: Interest on borrowed funds used to purchase specified private activity bonds are investment interest for AMT, up to the amount of the interest earned on the bonds.
Mortgage interest: For regular tax purposes, investment interest does not include qualified residence interest (i.e., deductible home mortgage interest for regular tax purposes). For AMT purposes, investment interest does not include qualified housing interest (i.e., deductible home mortgage interest for regular tax purposes).
NOTE: For the regular tax and AMT, investment interest that a taxpayer cannot deduct in the current year due to the net investment income limitation can be carried forward and deducted (subject to the limitation) in the next tax year. However, because of the difference in the investment interest rules for regular tax and AMT, a taxpayer’s carryforward amount may be different for regular tax and AMT.
For regular tax, under Code Sec. 421, a taxpayer that exercises an incentive stock option is not required to include the difference between the option price and the fair market value of the underlying stock at the time of exercise in income in the year of exercise. For AMT, this difference must be included in income in the year of exercise. Thus, the amount of the difference is an AMT adjustment.
NOTE: This adjustment does not apply if the taxpayer sells the stock received in the ISO exercise in the same tax year he or she exercises the ISO.
EXAMPLE: R exercises 100 ISOs in 2023 when the FMV of the stock underlying the options is $10 per share. R pays $5 per share when she exercises the ISOs. R does not recognize any income for regular tax in 2023 due to the exercise of the ISOs. In calculating AMTI, R must add $500, the difference between the amount she paid when she exercised the ISOs and the FMV of the stock she receives.
For AMT purposes, a taxpayer adds the amount of the adjustment to the basis of the stock.
EXAMPLE: The facts are the same as in the preceding example. R has a regular tax basis of $500 in the stock she receives when she exercises the ISOs, the price she paid to exercise the options. Her AMT basis in the stock is $1000, the price she paid to exercise the options plus the amount of her AMT adjustment.
The difference in basis caused by the ISO adjustment will usually cause an AMT adjustment on the disposition of the stock in the year the stock is sold. The AMT adjustment for the disposition of property is discussed below.
In general, unless a taxpayer elects to use the same method of calculating depreciation for regular tax and AMT on post-
NOTE: See the instructions for Form 6251, under the heading “Post-
For a taxpayer that owns an interest in a partnership or shares in an S corporation, the K-
The gain or loss recognized on the disposition of property may be different for regular tax and AMT because the property the taxpayer disposes of has a different basis for regular tax and AMT. This can occur for a number of reasons, including differences in depreciation deductions taken under the two systems for the property and in the case of stock received through the exercise of an ISO, the difference in basis caused by the ISO AMT adjustment discussed above. Because basis may be higher or lower for regular tax than it is for AMT, this adjustment may be positive or negative.
NOTE: It is important to remember that the $3,000 limitation on the deduction of capital losses that applies to individual taxpayers for regular tax also applies for AMT.
Alternative Tax Net Operating Losses, Amortization Expenses of Pollution Control Facilities, Circulation Costs, Long-
Except for adjustments passed through from partnerships, LLCs, and S corporations, these are all comparatively rare adjustments for individuals. More detail on these adjustments can be found in the instructions for Form 6251.
NOTE: If you own a sole proprietorship business and report any of these types of expenses on Schedule C, you should generally consult with a qualified tax professional when determining the amount of the AMT adjustment.
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