Alternative Minimum Tax - Explained
What is an Alternative Minimum Tax?
Written by Jason Gordon
Updated at September 18th, 2021
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Table of Contents
What is an Alternative Minimum Tax?How Does an Alternative Minimum Tax Work?Strategies to Reduce AMT Academic Research for Alternative Minimum TaxWhat is an Alternative Minimum Tax?
The alternative minimum tax calculation is done in parallel with the taxpayer's regular income tax calculation. AMT has discarded numerous preferential tax provisions to benefit the taxpayer; however, it also intends to ensure that high-income people at least pay a minimum tax.
Back to:ACCOUNTING & TAXATION
How Does an Alternative Minimum Tax Work?
AMT has removed some preferential tax provisions like non-taxable part of capital gains, stock options, Canadian dividends, tax shelter losses and equity interests in limited partners or corporation setting. Preferential tax treatment implies that tax rate is more suitable than that imposed to usual wages and interest incomes.Tax payers need to pay more between normal tax and AMT. A taxpayer must pay the minimum tax in case if it is more than the federal tax, computed in the usual manner. The minimum tax is to be paid if any of these elements are deducted:
- a taxable capital gain or loss, including share of loss from the partnership that is caused by the capital cost allowance
- deduction related to rental property
- a loss of limited partnership
- a loss arising from deducting the resource expenses from the depletion allowance
- financial expenses related to investments
- development expenses, or the expenses for Canadian oil property and gas
- stock options for a labor-sponsored fund
- a loan for relocation of employees
- a tax credit for the federal political contributions
- investment tax credit
- a federal dividend tax credit
- tax credit for employment across the border.
Strategies to Reduce AMT
If you have AMT more than your normal income, determine the ways to decrease the income that has been treated tax-preferentially, or has discretionary deductions for the coming years. If you have higher AMT, you may use the limiting Registered Retirement Saving Plan deductions for increasing the normal tax payable and carry forward the deduction balance to the next year. People earning huge amount of dividends from their business may increase their employment income. If the taxpayer is getting benefited from the 100% deductions for depreciation on self-employment, or leasing, he should decrease expenses and defer them to the coming year. Trading investment portfolios also helps earning full-rate income, like interest income, rather than dividend income. If you are paying the ATM this year, but not in the next year, you can claim the credits in computing your tax for this year for former minimum tax payments.
Academic Research for Alternative Minimum Tax
- The effect of book income adjustment in the 1986 alternative minimum tax on corporate financial reporting, Dhaliwal, D., & Wang, S. W. (1992). Journal of Accounting and Economics, 15(1), 7-26. This study evaluates the impact of the book income adjustment provision of 1980s alternative minimum tax, on the financial accounting practices. The proposed model determines the firms vulnerable to the book income adjustment. These firms financial accounting practices were affected by AMT. The findings of the study show that firms are prone to be affected by the book income adjustment shift timings.
- Earnings management and the corporate alternative minimum tax, Boynton, C. E., Dobbins, P. S., & Plesko, G. A. (1992). Journal of Accounting Research, 131-153.
- Earnings management of firms subject to the alternative minimum tax, Manzon Jr, G. B. (1992). The Journal of the American Taxation Association, 14(2), 88.
- Investment incentives under the alternative minimum tax, Lyon, A. B. (1990). National Tax Journal, 451-465.
- The alternative minimum tax and effective marginal tax rates, Feenberg, D., & Poterba, J. (2003). National Bureau of Economic Research. This paper evaluates the effect of AMT on the weighted average marginal tax rates applied to different elements of taxable income, as well as the effect of AMT reform proposals on AMT tax payers, revenue generated from AMT, weighted average marginal tax rates applied to wages, capital income, and deductions like local and state taxes and charitable gifts. We have used the NBER TAXSIM model for projecting the federal personal income tax liabilities and AMT liabilities between 2003 and 2013. The findings show that the AMT has a slight effect on the average marginal tax rates for majority of the sources of income as some AMT taxpayers are faced with higher marginal tax rates, and others with lower tax rates, due to the tax.
- Tax incentives to hedge, Graham, J. R., & Smith, C. W. (1999). The Journal of Finance, 54(6), 2241-2262. For the businesses faced with tax-function convexity, hedging decreases the anticipated tax liabilities. The paper uses simulation methods to examine the convexity developed by tax-code provisions. The tax function, on average, is comvex. Carrybacks and carryforwards augments the range of income having incentives to hedge; while other taxcode provisions seemed to have minor impacts.
- The alternative minimum tax and the behavior of multinational corporations, Lyon, A. B., & Silverstein, G. (1995). (pp. 153-180). University of Chicago Press.
- Impact of the corporate alternative minimum tax, Dworin, L. (1987). National Tax Journal, 40(3), 505-513.
- The Case for Repealing the Corporate Alternative Minimum Tax, Chorvat, T. R., & Knoll, M. S. (2003). SMUL Rev., 56, 305.
- Incentive effects of the corporate alternative minimum tax, Bernheim, B. D. (1989). Incentive effects of the corporate alternative minimum tax. Tax Policy and the Economy, 3, 69-95.
- Discussion of earnings management and the corporate alternative minimum tax, Gramlich, J. (1992). Discussion of earnings management and the corporate alternative minimum tax. Journal of Accounting Research, 154-160.