AMT on Dividends: How Are They Taxed?

The Alternative Minimum Tax (AMT) is a parallel tax system that ensures certain taxpayers pay a minimum amount of tax. It operates alongside the regular income tax system, requiring some individuals to calculate their tax liability twice and pay the higher of the two amounts. Dividends, a form of investment income, can affect a taxpayer’s potential AMT liability. Receiving substantial dividend income increases a taxpayer’s overall income, which can be enough to trigger the AMT.

Regular Tax Treatment of Dividends

The tax treatment of dividend income depends on whether the dividends are classified as qualified or non-qualified. This distinction determines the tax rate applied to the income. Taxpayers receive a Form 1099-DIV from their brokerage, which reports the total dividends received and specifies the amounts for each category.

Qualified dividends receive preferential tax treatment and are taxed at lower long-term capital gains rates. For 2024, these rates are 0%, 15%, or 20%, depending on the taxpayer’s filing status and taxable income. To be considered qualified, dividends must be paid by a U.S. or qualified foreign corporation, and the investor must meet certain holding period requirements.

Non-qualified dividends, often called ordinary dividends, do not meet the criteria for preferential treatment. This category includes payments from certain real estate investment trusts (REITs) and dividends on stocks held for a short period. This dividend income is taxed at the taxpayer’s regular ordinary income tax rates, which for 2024 range from 10% to 37%.

How Dividends Impact the AMT Calculation

Qualified dividends are taxed at the same preferential 0%, 15%, or 20% rates under both the regular tax and AMT systems. The primary way dividend income affects the AMT calculation is by increasing a taxpayer’s Alternative Minimum Taxable Income (AMTI). A higher AMTI can push an individual over the annual AMT exemption amount or reduce the exemption they can claim, which can trigger or increase AMT liability.

A more direct impact comes from certain types of income reported as dividends but treated differently for AMT purposes. An example is interest from specified private activity bonds (PABs). These bonds are issued by state or local governments to finance projects for private entities, such as airports.

While the interest paid on these bonds is tax-exempt for regular income tax, it is considered a tax preference item for the AMT. This means tax-exempt interest from PABs must be added back to a taxpayer’s income when calculating their AMTI, as required under Internal Revenue Code Section 57. This adjustment increases the income base subject to the AMT, making income that was tax-free under the regular system taxable under the AMT.

This treatment stems from the purpose of the AMT, which is to recapture tax revenue from benefits the tax code provides. Investors in municipal bond funds holding PABs should be aware that “tax-exempt dividends” could have AMT consequences.

Determining Your Alternative Minimum Tax Liability

Calculating potential AMT liability is done on IRS Form 6251, Alternative Minimum Tax—Individuals. The form reconstructs your taxable income to arrive at a tentative minimum tax. If this amount is higher than your regular tax, you owe the difference as AMT.

The calculation starts with your taxable income from your Form 1040. You then make a series of adjustments by adding back certain deductions and income items treated differently for AMT. Common adjustments include adding back state and local tax deductions and tax-exempt interest from specified private activity bonds.

After all adjustments are made, you arrive at your Alternative Minimum Taxable Income (AMTI). You then subtract the applicable AMT exemption amount from your AMTI. For 2024, the exemption for a single filer is $85,700, but this amount begins to phase out for taxpayers with higher incomes. The remaining income is subject to AMT tax rates of 26% and 28% to calculate the tentative minimum tax.

Understanding the Minimum Tax Credit

Paying AMT in one year can generate a tax credit, known as the Minimum Tax Credit (MTC), which may reduce your regular tax liability in future years. This credit is calculated using Form 8801, Credit for Prior Year Minimum Tax, and provides relief for taxpayers who paid AMT due to timing differences.

The ability to claim the MTC depends on the adjustments that caused the AMT liability, which are categorized as “deferral items” or “exclusion items.” Deferral items, such as the exercise of incentive stock options or certain depreciation adjustments, create temporary differences in taxable income and therefore generate a credit. You can use this credit in a later year when your regular tax is higher than your tentative minimum tax.

In contrast, exclusion items create a permanent difference between regular taxable income and AMTI. The tax-exempt interest from specified private activity bonds is an exclusion item. This means any AMT paid as a result of this preference item does not generate a Minimum Tax Credit. The tax benefit is permanently disallowed for AMT purposes, and you cannot reclaim the extra tax paid in a future year.