Walking you through a detailed step by step example of how to calculate your AMT. Follow along with your own numbers pulled up
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Quick Summary
How the Alternative Minimum Tax is determined can be broken up into a few broad steps:
- Figure out or estimate your Total Income
- Subtract total above-the-line deductions or adjustments to get your Adjusted Gross Income (AGI)
- Subtract additional AMT eligible deductions
- Add in your total ISO Exercise Spread
- Use that number to determine and subtract your AMT exemption, if eligible, to get your Alternative Minimum Taxable Income (AMTI)
- Calculate your Alternative Minimum Tax based on the tax brackets.
Step 1: Figure out / Estimate your Total Income
If you’re on this website in the midst of tax season and you have all of your financial statements ready, I invite you to pull out those statements and follow alongside me.
If, however, you are here to plan for any potential tax you may owe to Uncle Sam, or are here to AMT Calculator AMT Calculator and want to understand the meaning behind the numbers, you will need to do your best estimation of many of the below. I often find using the previous year’s tax return can be helpful.
We’ll start by assessing your total income, which includes not just your salary and wages, but also things such as capital gain/loss from stock or real estate investments, social security benefits, IRA distributions, pensions, etc.
Also please note that in regards to capital gains, you will first need to determine if you have a net gain or loss, and if that is a short term or long term capital gain/loss. A net long term gain would be treated differently, and won’t be covered here to avoid confusion.
For the purposes of this example, let’s assume:
- You are filing as Single
- You have a salaried job that pays $140,000 a year
- And you have also dabbled around with the stock market, but due to an unforseen global pandemic, you’ve lost or are projected to lose a good $20,000 on the year in short term capital losses.
You would end up with the below:
| Item | Value |
|---|---|
| Wages, Salaries, Tips | $140,000 |
| Net Capital Loss | -$20,000 |
| ————- | ————- |
| Total Income | $120,000 |
Step 2: Subtract Adjustments and get your Adjusted Gross Income (AGI)
There is a laundry list of possible adjustments or above-the-line deductions that can be found in your 1040 Schedule 1, so we will only use some of the most common.
Let’s say you are a few years out of college in your late 20s so you:
- Maxed out your Traditional 401k through work
- Are in a High Deductible Health Plan and contributing to an HSA,
- Invested in a Roth IRA
- And you’re still paying off those darn student loans
Your updated table might look like the following now:
| Item | Value |
|---|---|
| Total Income | $120,000 |
| ————- | ————- |
| Adjustment: Traditional 401k | $20,500 |
| Adjustment: HSA | $3,650 |
| Adjustment: Traditional IRA | 0 (Remember, you’re in a Roth IRA) |
| Adjustment: Student Loan Interest | $500 |
| ————- | ————- |
| Subtract Total Adjustments | -$24,650 |
| ————- | ————- |
| Adjusted Gross Income (AGI) | $95,350 |
Important to note here is that if you contribute to, say, a Traditional 401k through your employer, the actual line item in your W2 for ‘Wages, Salaries, Tips’ will already reflect those contributions. For the purposes of this example, we will use your gross income (before 401k contributions).
Step 3: Subtract AMT eligible deductions
There are also quite a few AMT eligible deductions, most of which are not commonly used or known. These include drilling costs, biofuel producer credits, or most commonly, deductions on mortgage interest paid. If you’re in a complex situation, I’d always advise consulting with a tax advisor.
For the purposes of this example we will presume that you own a home and you want to subtract your mortgage interest paid this year, which turns out to be $5,000.
As an aside, calculating this could be a pain if you have a jumbo loan, due to the restrictions placed by the Tax Cuts and Jobs act of 2017. You can read more about the mortgage interest deduction here.
| Item | Value |
|---|---|
| Adustable Gross Income (AGI) | $95,350 |
| Subtract Deduction: Mortgage Interest Paid | -$5,000 |
| ————- | ————- |
| Net | $90,350 |
Step 4: Figure out and add in your total ISO Exercise Spread
The short definition of the ISO Exercise Spread is the difference between your Strike Price and the Fair Market Value of your company’s stock at time of exercise. If all of this seems like latin to you, take a look at our introduction to the incentive stock option. You then take your spread and multiply it by the number of options exercised. Do this for the totality of all grants you exercised from and add them up.
ISO Spread Subtotal = (FMV - Strike Price) * ISOs Exercised
For this example, let’s assume you exercised 1,500 options at a strike price of $1.00. At the time of exercising, your company has a Fair Market Value (FMV) of $5.00. And to keep the example simple, you did not sell any of these exercised options this year. Let’s calculate the spread.
| Line Item | Value |
|---|---|
| Fair Market Value | $5.00 |
| Strike Price | $1.00 |
| ————- | ————- |
| Spread (per option) | $4.00 |
| Multiply: Number of Options Exercised | 1,500 |
| ————- | ————- |
| Total ‘ISO Exercise Spread’ | $6,000 |
Great! Now let’s add that in to the net number you obtained from step 3. This will give us our ‘AMTI for Exemption’, or the base number we use to determine how much of an exemption we are eligible to take.
| Item | Value |
|---|---|
| Net value from Step 3 | $90,350 |
| Add ISO Exercise Spread | +6,000 |
| ————- | ————- |
| AMTI for Exemption | $96,350 |
If you exercised and sold off incentive stock options in the same calendar year, you do not include these in AMT calculations! This is considered a disqualifying disposition and will already be included in your total income / short term capital gains calculations. Your company may also send a notice reflecting this situation.
Step 5: (Almost there!) Figure out your AMT Exemption
The AMT Exemption is a special exemption you can take as part of the AMT tax system. It is a very straightforward calculation up until you start making in excess of around $539,900 as a single filer, or over around $1,079,800 as married, filing jointly. If you fall into this category, I would advise you to spend a minute or two reading up on the math behind the phaseout thresholds by understanding the differences between the regular and AMT tax code. We won’t go into that for this example.
This is essentially a large chunk of money you can subtract before calculating the actual AMTI. Think of it like a special type of deduction, that almost everyone can take. The actual exemption in tax year 2022 (which means you file in 2023) is:
- $75,900 for single filers
- $59,050 for Married, Filing Separately
- $118,100 for Married, Filing Jointly
| Item | Value |
|---|---|
| ‘AMTI For Exemption’ | $96,350 |
| Subtract AMT Exemption | -75,900 |
| ————- | ————- |
| Alternative Minimum Taxable Income (AMTI) | $20,450 |
Step 6: Last step! Let’s calculate our the Alternative Minimum Tax we (may) owe
The AMT tax bracket functions just like the regular income tax brackets, in that it is marginal tax, but much simpler. There are only 2 tax rates. Everything under a certain amount is taxed at one percentage, and everything over is at the other.
| Alternative Minimum Tax Rate | Single Filing: | Married, Filing Separately: | Married, Filing |
|---|---|---|---|
| 26% | $0 | $0 | $0 |
| 28% | $206,100 | $103,050 | $206,100 |
So it looks like, with an AMTI of only 20,450, we will only need to pay a 26% flat tax on that. Let’s summarize all we’ve done and calculate the final Alternative Minimum Tax.
| Line Item | Value |
|---|---|
| Wages, Salaries, Tips | $140,000 |
| Net Capital Loss | -$20,000 |
| ————- | ————- |
| Total Income | $120,000 |
| Subtract Total Adjustments | -$24,650 |
| ————- | ————- |
| Adjusted Gross Income (AGI) | $95,350 |
| Subtract Eligible Deductions (Mortgage Interest) | -$5,000 |
| Add in ISO Exercise Spread | +$6,000 |
| ————- | ————- |
| ‘AMTI For Exemption’ | $96,350 |
| Subtract AMT Exemption | -$75,900 |
| ————- | ————- |
| Alternative Minimum Taxable Income (AMTI) | $20,450 |
| ————- | ————- |
| Alternative Minimum Tax Owed (Taxed @ 26%) | $5,317 |
But do you actually owe $5,317 in taxes?
As mentioned in our previous articles, in any given tax filing year, you would only pay the larger of either your Regular Income Tax or the Alternative Minimum Tax.
Thus, in order to determine whether you actually need to cough up a few grand to Uncle Sam, you would also need to calculate your Regular Income Tax. We know it’s a pain to do the math, so we have built an AMT Calculator AMT Calculator so you don’t have to!