Alternative Minimum Tax

The tax law gives special treatment to certain kinds of income and allows special deductions for
certain kinds of expenses. The AMT was designed to increase the tax bill of taxpayers who take
undue advantage of these tax benefits to avoid significant tax liability.

The basic mechanism by which the AMT accomplishes its objective is by treating certain items less
favorably than they are for purposes of the regular tax. These items are referred to as “tax
preferences” or “adjustments.” Adjustments differ from preferences only in that adjustments involve a
substitution of a special AMT treatment of an item for the regular tax treatment (for example, no
deduction is allowed for personal and dependency exemptions), while a preference generally
involves the addition of the difference between the special AMT treatment and the regular tax
treatment (for example, depletion is limited to the adjusted basis of the property).

The AMT starts with your regular taxable income and, in general, makes you “give back” the tax
preferences and adjustments until you arrive at “alternative minimum taxable income” (AMTI).

Then, after subtracting an exemption amount (discussed below), a tax rate of 28% applies

to amounts above $191,500. (For unmarried taxpayers, the rate changes at $95,750.)

However, the AMT rates for long-term capital gains, as well as dividends that qualify

to be taxed at long-term capital gain rates, are the same favorable
rates that apply for regular tax purposes.

In 2018, the exemption amount is $70,300 for unmarried and $109,400 for married individuals.

In 2018, the threshhold amount is $500,000 for unmarried and $1,000,000 for married individuals.

If the tax liability under the AMT system is higher than your regular tax liability, you must pay the
higher amount. If the AMT liability comes out below your regular liability, then the AMT has no tax
impact on you and you simply pay the regular tax.

You may be subjected to the AMT even if you have no tax preferences. For example, if you have a
large family, elimination of the personal and dependency exemptions to which you are entitled for
regular tax purposes may cause you to be subject to the AMT.

You compute the AMT on a special IRS form (Form 6251) that must be attached to your Form 1040.

Adjustments and preferences. The following are some of the more common adjustments or
preferences required to arrive at AMTI:

(1) Tax-exempt interest. Tax-exempt interest from certain private activity bonds (other than qualifying
bonds issued in certain years) isn’t exempt for AMT purposes. Thus, although you exclude this
interest from your regular taxable income, you must include it in AMTI.

(2) Interest deduction. For AMT purposes you can only deduct mortgage or home equity loan
interest on funds you borrowed to buy, build, or substantially improve your home or a second
residence (or on the refinancing of that debt). So, if you claimed a regular tax deduction for interest
on a home equity loan that you didn’t devote to the home, you would have to add it back in
determining AMTI. Also, an adjustment may have to be made to your investment interest deduction
in some cases for AMT purposes.

(3) State and local tax deduction. For AMT purposes, you get no deduction for state and local
income taxes, or real estate or other property taxes, although a deduction is allowed for regular tax
purposes. So you will have to add any income or property taxes you deducted for regular tax
purposes back to taxable income in determining AMTI.

(4) Medical expenses. If you are deducting any medical expense for regular tax purposes, some of
the deduction will be lost for AMT purposes. For regular tax purposes, medical expenses are
deductible to the extent they exceed 7.5% of adjusted gross income (AGI). For AMT purposes,
however, they are only deductible to the extent they exceed 10% of AGI. Thus, you would compute
your reduced deduction amount and add the difference back to taxable income in determining AMTI.
(For example, if your “regular” medical deduction was $8,000 and your AMT medical deduction is
$6,000, you would add back $2,000 to taxable income.)

(5) Miscellaneous itemized deductions. If you are entitled to a regular tax deduction for any
miscellaneous itemized expenses (these are deductions that are limited, even for regular tax
purposes, to the excess over 2% of your AGI), you would not get any deduction for them for AMT
purposes, regardless of what they are comprised of.

The 2% itemized deductions should be eliminated with the Trump tax law changes in 2018.

(6) Personal and dependency exemptions. These aren’t allowed. You must add them back to your
regular taxable income in determining AMTI.

(7) Standard deduction. If you take the standard deduction instead of itemizing, you must add back
the deduction to determine AMTI.

(8) Incentive stock options (ISOs). The favorable tax treatment allowed for ISOs isn’t allowed for
AMT purposes. This means that although you don’t pay any regular tax when you exercise an ISO,
you may have to pay AMT on the value of the stock you receive (minus what you paid for it) in the
year you exercise the ISO unless you sell the stock that year. This is true even if the stock price
declines significantly after you exercise the ISO.

(9) Depreciation deductions. For certain depreciable property, the depreciation schedules are slower
for AMT purposes than for regular tax purposes. Therefore, some adjustments may have to be made
in your depreciation deductions, and in the gain or loss on the sale of this property.

(10) Depletion. For AMT purposes, depletion is allowed only to the extent of your adjusted basis for
the property.

(11) Other preferences. Other types of preferences may apply depending on your particular tax
situation. Please call if you would like me to review your overall tax situation from the AMT
perspective.

Exemption amounts. As noted above, in computing your AMT, after you arrive at AMTI, you subtract
an exemption amount.

A nonrecurring spike of income—for example, the recognition of a significant amount of capital gains
in a year—might trigger the phaseout (under the 25% reduction rules discussed above) of your AMT
exemption, which could result in an AMT liability. This could happen even though, as mentioned
above, the AMT rates on long-term capital gains and qualified dividend income are the same
favorable rates that apply for regular tax purposes. The inclusion of long-term capital gains in your
taxable income, as well as in your AMTI, might also affect your entitlement to various deductions and
credits, and the amounts of AMT preferences and adjustments, that vary or phase out depending on
the amount of your income.

AMT credit. Once you are subject to the AMT, you may be entitled to a credit (the “ minimum tax
credit” or “AMT credit”) which can reduce your tax liability in the future. You generally can’t use the
minimum tax credit to get a tax refund. However, a partial refund is available for credits that haven’t

been used after three tax years. Please let me know if you would like additional information about
this AMT credit.

If you would like us to review your tax situation from the AMT perspective or if you have additional
questions, please call.