CPA REG: Alternative Minimum Tax (AMT) Explained
Guide to the individual and corporate alternative minimum tax for the CPA REG exam, including AMT adjustments, tax preference items, exemption amounts, and the AMT credit.
Alternative Minimum Tax for the CPA REG Exam
The alternative minimum tax (AMT) is a parallel tax system designed to ensure that taxpayers with substantial economic income pay a minimum amount of tax regardless of deductions, exclusions, and credits available under the regular tax system. While the TCJA significantly reduced the number of individual taxpayers subject to AMT by increasing the exemption amounts, the AMT remains part of the tax law and is tested on the REG exam. The corporate AMT was repealed by the TCJA for tax years beginning after 2017, but the Inflation Reduction Act of 2022 introduced a new 15% corporate alternative minimum tax on book income for very large corporations (those with average annual adjusted financial statement income exceeding $1 billion).
Individual AMT Calculation
The individual AMT is calculated by starting with regular taxable income, adding back AMT adjustments and tax preference items to arrive at alternative minimum taxable income (AMTI), subtracting the AMT exemption amount, and applying the AMT rate (26% on the first portion and 28% on amounts exceeding a threshold, both adjusted annually for inflation). The tentative minimum tax is compared to the regular tax, and the AMT equals the excess, if any, of the tentative minimum tax over the regular tax.
AMT Adjustments
AMT adjustments are items that must be recalculated under AMT rules because the AMT uses different methods or disallows certain deductions. Major adjustments include: the standard deduction is not allowed for AMT purposes, state and local tax deductions are added back, medical expenses are subject to the same 7.5% floor as regular tax (these floors were equalized under the TCJA), depreciation on personal property placed in service after 1986 uses the 150% declining balance method over the ADS recovery period instead of 200% declining balance, and incentive stock option (ISO) exercises create an AMT adjustment equal to the spread between the exercise price and FMV at exercise (though no adjustment occurs for regular tax purposes until the stock is sold).
Certain itemized deductions that are allowed for regular tax purposes are not allowed for AMT, including home mortgage interest on debt not used to buy, build, or improve the home (though this distinction is less significant after the TCJA), and investment interest expense is recomputed using AMT rules.
Tax Preference Items
Tax preference items are always added to regular taxable income in computing AMTI. They include: the excess of percentage depletion over the adjusted basis of the property, the excess of intangible drilling costs (IDCs) over the amount that would have been allowed if IDCs were capitalized and amortized over 10 years (to the extent exceeding 65% of net oil and gas income), tax-exempt interest on private activity bonds (other than qualified 501(c)(3) bonds), and the exclusion of gain on qualified small business stock under Section 1202 (7% of the excluded gain is a preference item).
AMT Exemption Amount
The AMT exemption amount reduces AMTI before applying the AMT rates. The TCJA substantially increased the exemption amounts and their phase-out thresholds through 2025. The exemption and phase-out thresholds are adjusted annually for inflation. The exemption phases out at 25 cents for every dollar of AMTI exceeding the phase-out threshold. For example, the 2023 exemption was $81,300 for single filers and $126,500 for MFJ, with phase-outs beginning at $578,150 and $1,156,300, respectively.
AMT Credit
The AMT credit under IRC Section 53 allows taxpayers who paid AMT in a prior year to claim a credit against regular tax in a subsequent year. The credit applies only to AMT generated by timing differences (deferral items) such as depreciation adjustments and ISO exercises, not to AMT generated by permanent exclusion items such as state and local tax deductions. The credit is the excess of the regular tax (reduced by certain credits) over the tentative minimum tax in the carryforward year. The AMT credit can be carried forward indefinitely.
Common AMT Triggers
Even after the TCJA, certain items may still trigger AMT liability. The most common triggers include large exercises of incentive stock options, substantial state and local tax deductions (though the SALT cap reduces this impact), private activity bond interest, and significant depreciation differences. For exam purposes, candidates should be able to identify which items are AMT adjustments versus tax preference items and calculate the AMT liability.
Exam Tips
- AMT starts with regular taxable income, adds adjustments and preferences, subtracts the exemption
- The standard deduction and SALT deduction are not allowed for AMT
- ISO exercises create an AMT adjustment equal to the spread at exercise
- Tax preferences are always added; adjustments may increase or decrease AMTI
- The AMT credit only applies to timing difference items, not permanent exclusions
- The corporate AMT under TCJA was repealed; the new book income AMT applies only to the largest corporations
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