What is the Alternative Minimum Tax and How Does it Affect the R&D Tax Credit?

What is the Alternative Minimum Tax (AMT)?

The Alternative Minimum Tax (AMT) is a federal income tax imposed on individuals, corporations, estates and trusts that prevents higher income taxpayers from using certain credits and deductions to significantly lower their tax liability.

“Under the tax law, certain benefits can significantly reduce a taxpayer’s regular tax amount. The AMT sets a limit on those benefits. If the tax benefits would reduce total tax below the AMT limit, the taxpayer must pay the higher Alternative Minimum Tax amount,” as stated by the IRS.

When and Why was the AMT created?

The AMT was created in 1969 when Congress became aware that nearly 200 people with high incomes were legally using so many deductions and tax breaks that their federal income tax due was zero. The AMT was originally created as an attempt to make the tax system fairer.

What are the fundamentals of the AMT?

A person’s taxes are recalculated under a set of AMT rules that differ from regular tax rules. AMT rules disallow certain deductions that make it almost impossible for anyone to avoid being taxed.

Once the deductions are eliminated, the tax is recalculated. If the AMT tax is greater than the regular tax, the taxpayer owes the total of the AMT tax.

The IRS explains that, “the AMT is the excess of the tentative minimum tax (TMT) over the regular tax. Thus, the AMT is owed only if the tentative minimum tax is greater than the regular tax. The TMT is figured separately from the regular tax.”

The AMT is imposed on the adjusted amount of taxable income above a certain threshold.

What are the 2014 Alternative Minimum Taxable Income Thresholds and Exclusions?

  • Single or head of household taxpayers:
    • Threshold: $117,300
    • Exclusion: $52,800
  • Married taxpayers filing jointly:
    • Threshold: $156,500
    • Exclusion: $82,100
  • Married filing separately:
    • Threshold: $78,250
    • Exclusion:  $41,050

How does the AMT Affect the R&D Tax Credit?

AMT can determine whether a taxpayer is put in a refund due or taxes owed status with the IRS when they file for an R&D credit.

The R&D Tax Credit leads to a reduction in expenses which leads to an increase in income which results in an increase in tax liability. The R&D tax credit can only offset  the regular income tax, not the Tentative Minimum Tax. If the taxpayer is already required to pay the AMT, then claiming a R&D tax credit will not yield a tax reduction.

If the taxpayer paying AMT decides to claim the R&D Tax Credit in a previous year through an amended return, then the additional income received from the credit will more than likely result in a higher AMT and regular tax and not a credit or reduction.


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