A brief overview of AMTI and AMT: Certain income and expense items are not allowed for high-income taxpayers when calculating an alternative minimum taxable income. The AMTI is subtracted from the AMT exemption granted by the IRS, which is determined annually by inflation adjustments.
The AMT is an additional layer of taxes that is applied by the Internal Revenue Service to high-tax payers. If the IRS set cap is exceeded, it will restrict certain income and deductions. The calculation of AMT tax is based on the determination of the Alternative Minimum Taxable Income (AMTI). Here's an illustration to demonstrate it.
K earns $87,000 annually as a single tax payer. She correctly omitted the exercise of incentive stock options from her gross income. The amount paid by "K" was $6,100 for a stock that had a market value of $26,000. The AMT exemption for a single taxpayer is $81,300. What is the alternative minimum taxable income for K following the exemption?
- To calculate AMTI for AMT purposes, the elements of adjustments and preferences are added back and subtracted from the regular gross income. The AMTI for K is $106,900 due to the addition of $87,000 + $26,000 - $6,100.
- The AMTI will be $25,600 ($106,900 - $81,300) after a single taxpayer's AMT exemption of $81,000.
In a nutshell, Taxes are not charged to a taxpayer for both regular taxable income and Alternative Minimum Taxable Income (AMTI). The AMT system requires taxpayers to use two systems to calculate their tax liability instead.
- Under regular tax rules, standard deductions, exemptions, and credits are used to calculate regular taxable income.
- The AMTI recalculates taxable income by subtracting certain deductions and preferences that are not allowed under AMT rules.
- The taxpayer is required to pay either their regular tax liability or their AMT liability, whichever is higher.
- The AMT functions as a parallel tax system, guaranteeing that certain taxpayers (typically high-income individuals with numerous deductions) pay a minimum level of taxes.
