Alternative Minimum Tax (AMT)

 
Education, Taxes, Wealth Management June 14, 2023

Alternative Minimum Tax (AMT)

The Alternative Minimum Tax (AMT) is a separate tax system that operates along side regular income tax. Some high-income earners must calculate their income taxes under ordinary income tax rules and then under the AMT and pay the higher amount.

The ordinary tax code offers several tax benefits which can significantly reduce a taxpayer’s liability. AMT limits those benefits by adding back certain tax preference items into adjusted gross income (AGI). These tax preference items include:

  • Deductions for accelerated depreciation/depletion
  • Net income from oil and gas properties
  • Excess intangible drilling costs
  • Interest on special private activity bonds reduced by any deduction (not allowable in computing the regular tax) which would have been allowable if such interest were included in gross income
  • Qualifying exclusion for small business stock
  • Capital gains from exercise of stock options
  • Investment tax credits

These are added back into AGI to determine alternative minimum taxable income (AMTI). Then the AMT exemption is subtracted, and that amount is taxed at 26% or 28% depending on the level of income.

AMT was created to ensure taxpayers pay their fair share of taxes despite how many deductions they may have.

 

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Capital Management, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.

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