Alternative Minimum Tax (AMT) — 2025

AMT is a parallel tax system. Taxpayers pay the HIGHER of regular tax or AMT. Designed to ensure high-income taxpayers pay minimum tax despite deductions/credits. OBBBA made the higher TCJA AMT exemption amounts permanent.

AMT Exemption Amounts (2025)

Exemption phases out at 25% of AMTI exceeding the phaseout threshold (i.e., $0.25 reduction per $1 of AMTI above threshold).

AMT Rates

Common AMT Adjustments/Preferences

IS an AMT Preference (added back for AMT)

NOT an AMT Preference (allowed for AMT)

Key Exam Point

The most common traps: standard deduction IS a preference, charitable contributions are NOT. State/local taxes ARE a preference, mortgage interest is NOT. Memorize these four pairs.

AMT Calculation Flow

Regular taxable income
+ AMT adjustments/preferences
= Alternative Minimum Taxable Income (AMTI)
− AMT exemption (phased out at higher incomes)
= Taxable excess
× AMT rates (26%/28%)
= Tentative Minimum Tax (TMT)
− Regular tax
= AMT owed (if TMT > regular tax)

AMT Credits

Prior-year AMT can generate a Minimum Tax Credit (MTC), carried forward indefinitely to offset regular tax in future years when regular tax exceeds TMT. No carryback.

Key Exam Points

• AMT is calculated AFTER determining regular tax
• Some credits (foreign tax credit) are allowed against AMT; most are not
• State tax refunds don't count in AMT since the deduction was disallowed
• Intangible drilling costs, circulation expenditures, and mining costs have special AMT treatment
• Incentive stock options exercised but not sold = potential AMT trap (bargain element is AMT preference)

Kiddie Tax, Nanny Tax & §199A QBI Deduction (2025)

Kiddie Tax (§1(g))

Applies to certain children with unearned income >$2,700 (2025). The unearned income above $2,700 is taxed at the parents' marginal rate. Also applies to unemployment compensation received by the child.

Who it applies to (at least one parent must be alive at year-end):

• Child under 18 at year-end
• Child 18 at year-end whose earned income does NOT provide >half of support
• Child under 24 at year-end who is a full-time student AND earned income does NOT provide >half of support
• Child who is married filing jointly does NOT face kiddie tax

2025 thresholds:

• First $1,350: tax-free (dependent's standard deduction)
• Next $1,350: taxed at child's rate
• Over $2,700: taxed at parents' marginal rate

Reporting options:

• Child files own return with Form 8615 attached (most common method)
• Parent elects to include child's income on parent's return via Form 8814 — only allowed if child's income is solely interest/dividends/capital gain distributions AND total income is between $1,350 and $13,500. If income ≥$13,500, child must file own return.

Special: child's investment income may also be subject to NIIT, but only if child's net investment income exceeds the $200,000 single threshold (very rare).

Household Employment Tax ("Nanny Tax")

If you pay a household employee $2,800+ (2025), must pay:

• Social Security (6.2% each, employer + employee) on wages up to $176,100
• Medicare (1.45% each) on all wages
• Federal unemployment tax (FUTA): 6% on first $7,000 wages (offset by state credits up to 5.4%)

Household employee definition: You control what work is done AND how. Includes: nannies, housekeepers, gardeners, caregivers, drivers. NOT independent contractors (you control only result, not methods). A self-employed day-care provider caring for multiple families' children in their own home is NOT a household employee.

FUTA trigger: if employer pays any household employee $1,000+ in any calendar quarter of current or prior year.

Reported on Schedule H (Form 1040). Must obtain EIN; W-2 required if wages ≥$2,800. Employer is NOT required to withhold income tax (but may if employee requests). May need to increase withholding or pay estimated tax to avoid underpayment penalty.

Exempt from nanny tax: wages paid to your spouse, your parents, or your children under 21. (Exception: parent caring for your child or a person with a disability MAY be subject if certain conditions.) You cannot claim a household employee as a dependent merely because they live with you.

§199A Qualified Business Income (QBI) Deduction

20% deduction of qualified business income from pass-through entities (sole proprietorships, partnerships, S-corps, estates/trusts). Available regardless of whether taxpayer itemizes or takes standard deduction. OBBBA made the QBI deduction permanent and added a new $400 minimum deduction + expanded phase-in range — but these OBBBA changes apply only to tax years after Dec 31, 2025 (no effect on 2025 returns).

Key limits:

• Deduction = lesser of: (a) 20% of QBI + 20% of qualified REIT dividends + 20% of PTP income, OR (b) 20% of taxable income minus net capital gains (long-term capital gains net + qualified dividends)
• Overall business loss → no QBI deduction that year; loss carries forward and reduces future QBI
• Phase-in of W-2 wage / UBIA limits begins at taxable income > $197,300 ($394,600 MFJ, 2025); full limit applies above $247,300 ($494,600 MFJ)

SSTB (Specified Service Trade or Business): service professionals (doctors, lawyers, accountants, consultants, financial advisors, performing artists, etc.) face phase-OUT of deduction across the phase-in range. Above the range → NO §199A deduction for SSTB.

W-2 wage and basis limit (for non-SSTB above threshold): Deduction limited to greater of:

• 50% of W-2 wages paid by the business
• 25% of W-2 wages + 2.5% of unadjusted basis (UBIA) of qualified property

Applies to Schedule C, Schedule E (rentals meeting §162 trade-or-business test), Schedule F, K-1 income. NOT for W-2 wages, capital gains, interest/dividends (unless REIT dividends/PTP income), hobby income, or tax-exempt income.

§199A for Rental Real Estate

Rental real estate CAN qualify if it rises to level of a "trade or business" (§162). Safe harbor (Revenue Procedure 2019-38):

• Separate books for each rental
• 250+ hours of rental services per year
• Contemporaneous records maintained

If rental is a trade or business AND not SSTB, §199A deduction available.

Foreign Earned Income / Housing (cross-reference)

• FEIE: exclude up to $130,000 (2025, OBBBA) of foreign earned income (Form 2555); per-spouse
• Foreign housing exclusion/deduction: housing costs above 16% of FEIE cap ($20,800 base for 2025); exclusion for employer-paid, deduction for self-employed (reduces income tax but NOT SE tax)
• Cannot use FEIE and Foreign Tax Credit on the same income. See us-source-vs-foreign-source-income.md and foreign-accounts-fbar-fatca.md.