Section 56: Adjustments for Alternative Minimum Tax

The Alternative Minimum Tax (AMT) exists to ensure that taxpayers with high economic income pay a certain minimum amount of tax. This is achieved through a separate tax calculation that runs parallel to the regular income tax system. Section 56 of the Internal Revenue Code is a component of this system, outlining specific adjustments that must be made to a taxpayer’s income to determine if they are subject to the AMT.

The function of these adjustments is to redefine taxable income for the AMT calculation. The process systematically disallows or modifies certain deductions and exclusions that are permissible under regular tax rules, creating what is known as Alternative Minimum Taxable Income (AMTI). This separate calculation stems from the concern that without it, certain tax benefits could allow some taxpayers to significantly lower their tax liability, despite having substantial income. This ensures a contribution to the tax system that is more aligned with their overall economic reality.

Tax Preference Items

Tax preference items are specific income or deduction amounts that receive favorable treatment under regular tax law but must be added back when calculating income for the Alternative Minimum Tax. Governed by Internal Revenue Code Section 57, these items are always positive additions to income for AMT purposes, increasing the alternative minimum taxable income (AMTI).

One preference item involves interest from certain private activity bonds. While interest earned on most municipal bonds is exempt from regular federal income tax, interest from specified private activity bonds is not exempt from the AMT and must be included in the AMTI calculation. The amount added back is the tax-exempt interest minus any related expenses that would have been deductible if the interest were taxable.

Another preference relates to the exclusion of gain on the sale of qualified small business stock (QSBS). While a portion of the gain from selling QSBS held for more than five years can be excluded from regular income, for certain older stock, a fraction of that excluded gain must be added back for AMT purposes. For QSBS acquired after September 27, 2010, this add-back is not required.

Depletion allowances for mineral properties can also create a tax preference. Taxpayers can deduct depletion, which represents the exhaustion of natural resources. If the depletion deduction claimed for a property exceeds the taxpayer’s adjusted basis in that property, the excess amount is considered a tax preference item. This rule prevents the total deductions from exceeding the original investment in the property for AMT purposes.

Adjustments for Calculating AMTI

Adjustments for calculating Alternative Minimum Taxable Income (AMTI) are governed by Internal Revenue Code Section 56. Unlike preferences, these adjustments require a complete re-calculation of certain income and deduction items and can be either positive or negative. This means they can either increase or decrease AMTI compared to regular taxable income by using different, often less favorable, accounting methods.

A common adjustment for individuals is the limitation on state and local tax (SALT) deductions. For regular tax purposes, individuals who itemize can deduct certain state and local taxes, subject to a cap. For AMT purposes, no deduction is allowed for these taxes, meaning the full amount deducted on Schedule A must be added back to income when calculating AMTI.

Depreciation is another area requiring adjustment. For regular tax, businesses often use accelerated depreciation methods like MACRS, which allows for larger deductions in the early years of an asset’s life. For AMT, depreciation must be recalculated using the Alternative Depreciation System (ADS). ADS uses the straight-line method over a longer recovery period, resulting in smaller deductions in the initial years. The difference between the MACRS deduction and the ADS deduction is an adjustment to AMTI.

Incentive stock options (ISOs) receive significantly different treatment under AMT rules. For regular tax, no income is recognized when an ISO is exercised; tax is deferred until the stock is sold. For AMT purposes, the difference between the fair market value of the stock at the time of exercise and the price paid for the option is considered income in the year of exercise. When the stock is later sold, the AMT basis will be higher, resulting in a smaller gain for AMT purposes and creating a negative adjustment in that year.

Calculating the Alternative Minimum Tax

The calculation of the AMT begins with the taxpayer’s regular taxable income, which is taken from their standard income tax return, such as Form 1040. The next step is to add back all tax preference items and make all necessary adjustments to arrive at Alternative Minimum Taxable Income (AMTI).

Once AMTI is determined, the AMT exemption amount is subtracted. This exemption functions similarly to a standard deduction but is subject to a phase-out for higher-income taxpayers. For 2025, the exemption is $88,100 for single filers and $137,300 for joint filers. This exemption begins to phase out for taxpayers with an AMTI over $626,350 for single filers or $1,252,700 for married couples filing jointly.

The remaining income is then subject to the AMT tax rates, which are 26% and 28%. For 2025, the 26% rate applies to AMTI up to $239,100 for most filers, with the 28% rate applying to income above that amount. The result of this calculation is the Tentative Minimum Tax. The final step is to compare the Tentative Minimum Tax to the taxpayer’s regular tax liability; the taxpayer must pay whichever amount is higher.

Required Tax Forms and Reporting

The primary document for calculating and reporting the Alternative Minimum Tax for individuals is Form 6251, Alternative Minimum Tax—Individuals. This form must be completed and attached to the taxpayer’s Form 1040 if they are liable for the AMT. Tax preparation software often completes this form automatically based on the information entered.

Part I of Form 6251 is dedicated to calculating the Alternative Minimum Taxable Income (AMTI). It begins with the taxpayer’s adjusted gross income and then provides lines for specific adjustments and preferences to arrive at the final AMTI. Part II of the form calculates the Tentative Minimum Tax. This section is where the taxpayer subtracts their allowable AMT exemption amount, which may be determined using a worksheet to account for the income-based phase-out.

For corporations, the corresponding form is Form 4626, Alternative Minimum Tax—Corporations. The Tax Cuts and Jobs Act of 2017 repealed the corporate AMT for most corporations, but the Inflation Reduction Act of 2022 reinstated a new corporate AMT for “applicable corporations” with an average annual adjusted financial statement income over $1 billion. These corporations use Form 4626 to determine if they meet the income threshold and to calculate their potential AMT liability, which is based on 15% of their adjusted financial statement income.