Line 2c: Investment interest: The investment interest deduction may be different for AMT purposes because it depends on whether you have taxable private activity bond interest see line If you do, you may have an additional deduction for investment interest. Line 2d: Depletion: You can calculate depletion from mining, oil, gas, timber or other similar activities for regular tax purposes using either the cost or percentage depletion method. For AMT, only the cost method is allowed.
Suggestion: If this line is generating AMT on your tax return, consider electing the cost method of depletion. Line 2e: Net operating loss: If you claimed a net operating loss deduction on Form , you have to add it back to your income.
Line 2g: Private activity and tax-exempt bond interest: Normally, tax-exempt interest from private activity bonds is not tax-exempt for AMT purposes. A private activity bond is a state or local bond issued to provide funds for private, nongovernmental activities such as building a sports stadium, industrial development, student loan financing, or low-income housing. These bonds are often issued by states, counties or cities and are tax-exempt for regular federal tax, but not for the AMT.
If you invest in mutual funds, the you get will list how much interest you received from private activity bonds. This amount is entered on Line 12 to show the income as taxable for AMT purposes. Suggestion: If you are subject to the AMT, invest in tax-exempt bonds issued before that are not private activity bonds. Many mutual fund companies have two listings of state bond funds, one that contains private activity bonds, and one that doesn't. Read the literature carefully.
Line 2h: Section exclusion: You can exclude from your income some portion of the gain on the sale of qualified small business stock held more than five years. The gain on the sale of this stock is 50 percent excludable for regular tax purposes, but 7 percent of the excluded gain is added back for AMT purposes. Suggestion: In the year that you sell qualified small business stock, try to eliminate or reduce as many other AMT adjustments as possible to get the maximum gain exclusion on the sale of the stock.
Line 2i: Incentive stock options: This line is another common problem for people affected by the AMT. If you exercise an Incentive Stock Option ISO but do not sell the stock in the year of exercise, the transaction is not taxable that year for regular tax purposes. However, the difference between the exercise price and the fair market value of the stock on the day of the exercise is an adjustment for AMT purposes and appears on Line For many people, this adjustment can be a very large number.
Essentially, you are going to be taxed on a hypothetical profit what you might have made if you sold the stock on the day you bought it. When you later sell the stock, you will have an entry on Line 18, Disposition of Property Difference, to account for the difference in your tax basis for regular and AMT purposes.
Suggestion 2: When you exercise ISOs, always use tax planning software to forecast the tax consequences. You may need to sell some of the stock in the year of the exercise to pay the tax due.
Line 2j: Estates or trusts: This line contains differences between AMT and regular tax deductions from estates or trusts. Unfortunately, decisions by the administrators of the estate or trust may be beyond your control.
Line 2k: Disposition of property difference: The tax basis in assets that you sold may be different for regular and AMT purposes depending on the depreciation method you chose see Line 19 , or on your incentive stock options see Line Line 2l: Post depreciation: On this line, you enter the depreciation difference for regular and AMT purposes.
For AMT purposes, you generally must depreciate deduct business assets over a longer period of time than you can for regular tax purposes. This creates a difference between regular tax depreciation and AMT depreciation. This is an entry that does self-correct. By the time the asset is completely written off, you have received the same deduction for both regular and AMT purposes. Suggestion: If you have an entry on this line, consider electing a slower depreciation method for your business assets, which could eliminate the AMT adjustment.
Line 2m: Passive activities: This line contains the differences between AMT and regular tax deductions for passive activities. This line usually relates to a difference in depreciation methods for rentals, partnerships or S Corporations.
Suggestion: If the adjustment is from a rental property, consider using slower depreciation methods for regular tax purposes to eliminate an entry on this line. If the adjustment is from a partnership or S Corporation, the depreciation methods are selected at the entity level and there is probably nothing you can do. Depending on your percentage of ownership, you may discuss with the management of these investments any items that are generating AMT on your tax return to see if the AMT impact can be lessened in future years.
Line 2o: Circulation expenditures: This line relates to the difference between how newspaper or magazine circulation expenditures are deducted under both tax systems. Suggestion: If you have an entry on this line, consider making an election under Internal Revenue Code IRC section 59 e to amortize these expenses over three years for regular tax purposes.
This will eliminate the entry on this line for AMT purposes. Line 2p: Long-term contracts: Long-term construction contractors are generally required to use the percentage of completion method of accounting for long-term contract revenue, rather than the completed-contract method.
This is a timing difference that will reverse in later years. Line 2q: Mining costs: Mining exploration and development costs may also generate an AMT adjustment unless you make an IRC section 59 e election to write-off the costs over 10 years.
Making the election eliminates an entry on this line. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights.
Measure content performance. Develop and improve products. List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways AMT ensures that certain taxpayers pay their fair share or at least the minimum. It doesn't kick in until income reaches a certain level.
In , Congress passed a law that indexed the exemption amount to inflation to prevent middle-income taxpayers from experiencing bracket creep. Article Sources. Investopedia requires writers to use primary sources to support their work. The alternative minimum tax AMT applies to taxpayers with high economic income by setting a limit on those benefits. It helps to ensure that those taxpayers pay at least a minimum amount of tax. The AMT is the excess of the tentative minimum tax over the regular tax.
Thus, the AMT is owed only if the tentative minimum tax for the year is greater than the regular tax for that year. The tentative minimum tax is figured separately from the regular tax.
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