What is the Alternative Minimum Tax (AMT) & Form 6251?

Most US expats are familiar with ordinary income taxes, which range from 10% to 37% depending on overall taxable income. Through expat-specific tax breaks, Americans abroad can often greatly reduce or eliminate their US tax liability. While this is generally a good thing, it can make high-income expats more susceptible to the Alternative Minimum Tax (AMT).

Established in 1969, the AMT ensures that high-income taxpayers, whose tax liability would ordinarily be minimal through credits, deductions, and exemptions, still pay their fair share in taxes. While the vast majority of expats will only find ordinary income tax on their annual filing, the AMT may require consideration by those with particularly high incomes.

Knowing when the AMT kicks in and how to calculate it can be tricky — and we’re here to guide you through it. Read on for a brief but thorough rundown of the AMT.

Who is subject to the alternative minimum tax?

Any American with adjusted gross income (AGI) — i.e. total income minus adjustments — that exceeds a certain threshold must calculate the AMT. If your AMT liability is higher than your ordinary income tax liability, you’ll have to pay the AMT amount; otherwise, you’ll pay according to ordinary rates.

Those subject to the AMT are allowed to subtract a specific AMT threshold amount from income before calculating the tax. These thresholds are also called AMT exemptions. The 2017 Tax Cuts & Jobs Act (TCJA) also established “phase-outs” which reduce the AMT exemptions by 25 cents for every dollar of income over the initial threshold, ultimately bringing the exemptions to zero at certain earnings levels. 

Prior to the TCJA, the exemption thresholds were significantly lower — which meant that more middle- and upper-middle-income earners were subject to the AMT. The TCJA raised these thresholds, reducing the number of people subject to the AMT. However, phase-outs of the exemption still apply to very high earners, potentially increasing their AMT liability.

	Single filers		Married filing jointly		Married filing separately
Tax year 2023	Exemption	Phase-out	Exemption	Phase-out	Exemption	Phase-out
	$81,300	$578,150	$126,500	$1,156,300	$63,250	$578,150
Tax year 2024	Exemption	Phase-out	Exemption	Phase-out	Exemption	Phase-out
	$85,700	$609,350	$133,300	$1,218,700	$66,650	$609,350

Certain individuals under 24 with unearned income (such as investment income) subject to the kiddie tax, may also be subject to an alternate AMT exemption: their earned income plus $8,800 (for 2023). 

Example: Todd, a US expat who is CTO of a tech company, earned $600,000 in tax year 2023. 

• His income exceeds the phase-out threshold by $21,850 ($600,000 – $578,150)
• His AMT exemption decreases by 25% of the phase-out threshold excess ($5,462.50)
• Subtracting that figure from the standard exemption ($81,300), his new AMT exemption is now $75,837.50 ($81,300 – $5,462.50)

Because Todd’s Alternative Minimum Taxable Income (AMTI) of $600,000 exceeds his AMT exemption ($75,837.50), he must calculate the AMT and see if he’s subject to it.

How do you calculate the alternative minimum tax?

If your adjusted gross income exceeds the AMT threshold, you must calculate your tax liability under both the ordinary income tax system and the AMT. The government levies AMT tax rates of either 26% or 28% on income exceeding the AMT threshold, depending on the amount.

	Single filers		Married filing jointly		Married filing separately
	2023	2024	2023	2024	2023	2024
26% AMT	Up to $220,700	Up to $232,600	Up to $220,700	Up to $232,600	Up to $110,350	Up to $116,300
28% AMT	$220,700+	$232,600+	$220,700+	$232,600+	$110,350+	$116,300+

Example: Let’s go back to Todd, who had an AGI of $600,000 and an AMT exemption of $75,837.50 in tax year 2023.

• The amount of his income subject to AMT is $524,162.50 ($600,000 – $75,837.50)
  • The first $220,700 of that income would be subject to a 26% tax, resulting in a charge of $57,832
  • The remaining $303,462.50 of his income ($524,162.50 – $220,700) would be subject to a 28% tax, resulting in a charge of $84,969.50
• His total AMT liability would therefore be $142,801.50 ($57,832 + $84,969.50)

Let’s say that under the ordinary income tax system — which allows for many different tax credits, exclusions, and deductions, both expat-specific and general — Todd’s US income tax liability is $60,000. Because his AMT liability ($142,801.50) is higher than his standard liability ($60,000), he must pay the AMT rate.

What triggers the alternative minimum tax?

The exact situations that trigger the alternative minimum tax can vary depending on individual circumstances, but the following factors typically play a significant role:

• High income: The AMT was specifically created with high-income taxpayers who qualified for tax breaks in mind. So as a general rule, the higher your income, the more likely you are to be subject to the AMT
• Incentive stock options (ISOs): When you exercise a large amount of stock options but don’t sell them, you don’t have to factor it into your ordinary taxable income — but it is included in your AGI
• Long-term capital gains: Large amounts of long-term capital gains typically reduce or eliminate the AMT exemption amount
• Tax-exempt interest: Interest income from private activity bonds is excluded from your overall taxable income, but not for your AGI
• Certain tax breaks: You can use a variety of different tax deductions, exemptions, and credits to reduce your overall taxable income. However, adjusted gross income calculated for AMT purposes excludes many of these tax breaks, like:
  • The Foreign Earned Income Exclusion (FEIE), one of the most important tax breaks for US expats
  • Personal exemptions
  • The standard deduction
  • Most itemized deductions (e.g. state and local taxes, medical expenses, business expenses)

With advanced tax planning, however, you may be able to reduce your AMT liability or in some cases, even avoid it altogether.

How to reduce the alternative minimum tax

There are certain ways to reduce your AGI, which in turn reduces your AMT liability. For instance:

• Tax credits: Unlike tax deductions and exemptions, you can generally use nonrefundable personal tax credits like the Child Tax Credit (CTC) and Foreign Tax Credit (FTC) to offset your AMT income
  • Note: Ordinarily, the FTC gives you dollar-for-dollar credits on any foreign income taxes you’ve paid that directly reduce your US tax liability. With the AMT, though, FTC benefits may be limited or not applicable to certain types of income
• Contributions: You can deduct contributions to certain retirement accounts (e.g. 401k, simple IRA, 403b) and flexible spending accounts (FSAs) from your AGI
• Taxable investment reallocation: Some investments — like certain mutual funds, bonds, and bond funds — are more tax-efficient than others
• Timing: There are multiple ways that timing can help you reduce your AMT liability:
  • Incentive stock options: Waiting to exercise stock options until a year when you have lower income — or slowly exercising them over time — can help you avoid exceeding the AMT exemptions
  • Investments: Again, waiting to sell investments or selling them little by little can help you avoid a big spike in your AGI. Tax-loss harvesting may also help offset large gains that contribute to AGI
  • Deductible expenses: You may want to wait to make certain expenses so you can claim deductions in a year when you don’t expect to qualify for the AMT 

This is far from an all-inclusive list, however. If you think you may be subject to the AMT, the best way to reduce it is by consulting an experienced tax professional.

Form 6251: Reporting the alternative minimum tax

Anyone whose AGI exceeds the AMT thresholds will determine whether they owe the AMT — and if so, calculate how much they owe — on Form 6251. 

Form 6251 can be e-filed along with the federal tax return, Form 1040. While the standard Form 1040 tax deadline is April 15th, Americans filing from abroad receive an automatic extension until June 15th which they can extend further to October 15th upon request.

Form 6251 consists of three different parts. Up top, you’ll enter your name and Social Security Number (SSN). Then, you’ll use Part I: Alternative Minimum Taxable Income (AMTI) to calculate the amount of your income subject to the AMT. To arrive at this number, you’ll take your ordinary income and subtract various deductions, expenses, and other tax breaks.

In Part II: Alternative Minimum Tax (AMT), you’ll calculate your AMT liability or credit.

Finally, in Part III: Tax Computation Using Maximum Capital Gains Rates, you’ll calculate how much of your AMT is directly attributable to capital gains, which may give you an AMT credit to use in the future. Note that you should only fill this section out if your results in Line 7 or the Foreign Earned Income Tax Worksheet indicate you must.

While Form 6251 is just two pages, it’s notoriously complex. Even with IRS instructions, most taxpayers struggle to fill this section out on their own. As a result, you may need help from a tax professional. 

Accurate, optimized, effortless taxes

The AMT may not apply to most US expats, but those whose AGI exceeds thresholds could very well be subject to it. Calculating and reporting your AMT liability can be complex, but fortunately, there are ways to reduce it. That said, certified tax professionals are the most qualified to minimize AMT liability and complete Form 6251. 

Resources:

1. Top Ten Things that Cause AMT Liability
2. Are You Now Safe From the Alternative Minimum Tax?