These additions and subtractions are called AMT adjustments. Individual taxpayers in some cases must also increase regular taxable income in some cases due to the different treatment of certain other tax items for AMT purposes under Code Sec.

These increases, called AMT preferences, are discussed on the AMT Preferences page.

Some of the adjustment items are very common, while others only affect a small number of individual taxpayers. These adjustments are discussed below. All line references below are to the Form Limitation on Overall Itemized Deductions. The overall limitation on itemized deductions, reinstated in , is an adjustment for AMT on Form , line 6.

Therefore, an individual taxpayer must add back these deductions in calculating AMTI. An individual taxpayer reports the AMT adjustment amount for these items the amount from line 27 of Schedule A, Form on Form , line 5.

State, Local, and Foreign Taxes. No deduction is allowed in calculating AMTI for the taxes listed in Code Secs. Therefore, an individual taxpayer must add back deductions for these taxes in calculating AMTI. An individual taxpayer reports the AMT adjustment amount for these items line 9 of Schedule A, Form on Form , line 3. Standard Deduction and Personal Exemptions.

Stock Options and the Alternative Minimum Tax (AMT)

The basic and additional standard deduction and the deduction for personal exemptions are not allowed for AMT. Because the calculation of AMTI starts with adjusted gross income AGI for individual taxpayers taking the standard deduction AGI less itemized deductions for taxpayers who itemize , no entry is necessary on Form to take into account the adjustments for the standard deduction and the personal exemption.

The disaster loss deduction under Code Sec. For years before , they are deductible for regular tax purposes to the extent that they exceed 7. For and later years, the deduction will be the same for regular tax and AMT, so no adjustment will generally be necessary.

However, in through , a transitional rule in Code Section f allows taxpayers 65 years and older to continue deducting medical and dental expenses in excess of 7. However, this rule will not apply in determining the AMT deduction.

Therefore, taxpayers affected by Code Section f will have an AMT adjustment for medical and dental expenses in those years. The rules for deducting mortgage interest are more restrictive for AMT than for regular tax.

If a taxpayer can deduct more mortgage interest for regular tax than for AMT, the difference is an adjustment that the taxpayer adds back in calculating AMTI.

For the regular tax, individual taxpayers can deduct interest on a mortgage loan that the taxpayer used to purchase a qualified residence i. The taxpayer may also deduct interest on a home equity loan or line of credit. For the AMT, an individual may only deduct interest on a mortgage loan used in acquiring, constructing, or substantially improving a principal residence or qualified dwelling.

However, for AMT purposes, the second residence can only be a home, apartment, condominium, or a mobile home not used on a transient basis. An individual taxpayer adds back the amount of the adjustment for mortgage interest in calculating AMTI on Form , line 4.

Grants or Awards of Stock

T owns a home and a boat that qualifies as a residence for purposes of the regular tax mortgage interest deduction. T has an original mortgage loan used to purchase the home, a home equity line of credit on the home that he has used solely to pay for several vacations, and a loan secured by the boat that he used to purchase the boat. For regular tax purposes, T will be able to deduct the interest on all three of these loans.

For AMT purposes, he will only be able to deduct the interest on the original home mortgage loan. T must add back the interest on the home equity line of credit and the boat loan in calculating his AMTI. For regular tax purposes, an individual taxpayer can deduct investment interest to the extent of his or her net investment income.

A taxpayer also can deduct investment interest to the extent of net investment income for AMT purposes, but the taxpayer must take AMT adjustment and preference items and the AMT loss disallowances under Code Sec. Investment interest that a taxpayer cannot deduct in the current year due to the net investment income limitation can be carried forward and deducted subject to the limitation in the next tax year.

The difference between the regular tax deduction for investment interest and the AMT deduction for investment interest is an AMT adjustment that is included on Form , Line 8. Interest on a mortgage loan that is deductible under the AMT rules for home mortgage interest described above is not investment interest.

However, where the taxpayer uses the proceeds of a mortgage loan to purchase investment property, the interest on the loan is deductible investment interest for AMT purposes if it is not deductible under the home mortgage interest rules. Interest on borrowed funds used to purchase private activity bonds are investment interest for AMT because the interest from private activity bonds is included in AMTI.

Likewise, the interest on private activity bonds is included in investment income. For regular tax, under Code Section , a taxpayer that exercises an incentive stock option is not required to include the difference between the option price and the fair market value of the underlying stock at the time of exercise in income in the year of exercise.

For AMT, this difference must be included in income in the year of exercise. This adjustment does not apply if the taxpayer sells the stock received in the ISO exercise in the same tax year he or she exercises the ISO. R does not recognize any income for regular tax in due to the exercise of the ISOs.

For AMT purposes, a taxpayer adds the amount of the adjustment to the basis of the stock. The facts are the same as in the preceding example. The difference in basis caused by the ISO adjustment will usually cause an AMT adjustment on the disposition of the stock in the year the stock is sold.

The AMT adjustment for the disposition of property is discussed below. In general, unless a taxpayer elects to use the same method of calculating depreciation for regular tax and AMT on post- assets, depreciation is calculated differently for regular tax and for AMT on those assets. The difference between the aggregate amount of depreciation deductions for regular tax and for AMT is an adjustment that is added back or subtracted in the calculation of AMTI on Form , line For a taxpayer that owns an interest in a partnership or shares in an S corporation, the K- 1 the taxpayer receives from the partnership or S corporation frequently includes a passthrough of an AMT depreciation adjustment amount.

On a partnership K- 1, the adjustment is reported on line 17 Code A. On an S corporation K- 1, the adjustment is reported on line 15 Code A.

The gain or loss recognized on the disposition of property may be different for regular tax and AMT because the property the taxpayer disposes of has a different basis for regular tax and AMT. This can occur for a number of reasons, including differences in depreciation deductions taken under the two systems for the property and in the case of stock received through the exercise of an ISO, the difference in basis caused by the ISO AMT adjustment discussed above.

Because basis may be higher or lower for regular tax than it is for AMT, this adjustment may be positive or negative. The taxpayer includes the adjustment in calculating AMTI on Form , line Alternative Tax Net Operating Losses, Amortization Expenses of Pollution Control Facilities, Circulation Costs, Long- Term Contract Expenses, Mining Costs, Research and Experimental Costs. Except for adjustments passed through from partnerships, LLCs, and S corporations, these are all comparatively rare adjustments for individuals.

More detail on these adjustments can be found in the instructions for Form If you own a sole proprietorship business and report any of these types of expenses on Schedule C, you should generally consult with a qualified tax professional when determining the amount of the AMT adjustment.

Submit a question to the AMT Advisor.

How Incentive Stock Options are Taxed

AMT Exemption Amounts Before Phase- Out Taxpayers Filing Single or Head of Household: AMT Adjustments In General Per Code Sec. The limitation on overall itemized deductions. Standard deduction and personal exemptions. Certain state, local and foreign taxes. Certain interest including home mortgage and investment interest.

Incentive Stock Option ISO exercises Depreciation deduction. Mining exploration and development costs. Long- term contract expenses. Alternative tax net operating losses.

Amortization deductions for pollution control facilities. Gain or loss on the disposition of property. Research and experimental expenses. Limitation on Overall Itemized Deductions The overall limitation on itemized deductions, reinstated in , is an adjustment for AMT on Form , line 6.

Unreimbursed employee business expenses. Tax return preparation fees. Expenses paid to collect or produce taxable income or to manage or protect property held to earn taxable income.

State, Local, and Foreign Taxes No deduction is allowed in calculating AMTI for the taxes listed in Code Secs. State, local, and foreign income, war profits, and excise taxes. State, local, and foreign real property taxes.

State and local personal property taxes. State, local, and foreign taxes paid or accrued in carrying on a trade or business or an activity for the production of income.

State and local sales taxes deducted in lieu of income taxes. Standard Deduction and Personal Exemptions The basic and additional standard deduction and the deduction for personal exemptions are not allowed for AMT. Interest Expenses Mortgage interest: Incentive Stock Options For regular tax, under Code Section , a taxpayer that exercises an incentive stock option is not required to include the difference between the option price and the fair market value of the underlying stock at the time of exercise in income in the year of exercise.

Depreciation In general, unless a taxpayer elects to use the same method of calculating depreciation for regular tax and AMT on post- assets, depreciation is calculated differently for regular tax and for AMT on those assets.

Disposition of Property The gain or loss recognized on the disposition of property may be different for regular tax and AMT because the property the taxpayer disposes of has a different basis for regular tax and AMT.

Alternative Tax Net Operating Losses, Amortization Expenses of Pollution Control Facilities, Circulation Costs, Long- Term Contract Expenses, Mining Costs, Research and Experimental Costs Except for adjustments passed through from partnerships, LLCs, and S corporations, these are all comparatively rare adjustments for individuals.

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