What Form 6251 Is For
Form 6251 calculates your Alternative Minimum Tax by comparing your regular income tax with a parallel tax system created to ensure a minimum tax liability for certain taxpayers. This form adjusts taxable income by revisiting itemized deductions, preference items, and exemption amounts to determine whether your tax burden increases under AMT rules.
When You’d Use Form 6251
You use Form 6251 when your tax year 2017 income level, deductions, or tax benefits trigger AMT review under section 55. This usually happens if you take large itemized deductions, have incentive stock options, earn interest from certain municipal bonds, or make adjustments reported on Schedule C, Schedule E, Schedule F, Schedule K-1, or Form 4835.
Key Rules or Details for 2017
- AMT exemption amounts: These amounts lower your taxable income when you earn above certain limits and help figure out if you owe extra tax under the AMT Tax Rate rules.
- Itemized deduction adjustments: Some itemized deductions from Schedule A need to be changed, and these changes make sure that regular tax rules don't lower tax revenue below what is expected under the AMT.
- Preference items: Preference items like small business stock exclusions and excess intangible drilling costs must be added back, which increases AMTI and may raise your Alternative Minimum Tax for the tax year.
- Capital gains treatment: Capital gains from Schedule D follow special AMT Tax Brackets, and applying these rates correctly prevents inaccurate tax calculations and helps ensure consistency with Internal Revenue Service rules.
- Foreign Tax Credit limits: The Foreign Tax Credit may be restricted for AMT, and using tax software or a financial advisor can help clarify how these limits affect your income tax return.
Step-by-Step (High Level)
Step 1: Calculate Alternative Minimum Taxable Income
Begin by adjusting the taxable income on Form 1040 to include preference items and specific add-backs. This includes reviewing Schedule A, interest on private activity municipal bonds, Schedule C activities, and modifications to net operating loss deductions. These adjustments produce the Alternative Minimum Taxable income needed for accurate comparison.
Step 2: Apply the exemption amount
Subtract the AMT exemption that matches your filing status, such as married filing jointly or single. These exemption amounts phase out at higher income thresholds and reduce your AMT liability. Correctly identifying this amount prevents miscalculations and maintains compliance with Internal Revenue Service standards.
Step 3: Calculate tentative minimum tax
Apply the two-tier AMT Tax Rate formula of 26 percent and 28 percent to the remaining taxable excess. If you report capital gains, follow the AMT capital gains worksheet. This step determines whether your tentative minimum tax exceeds the regular tax rules applied through Form 1040 or Form 1040-SR.
Step 4: Compare with the regular tax
Compare your tentative minimum tax with the regular income tax from Form 1040 or Schedule 2. If the AMT is higher, the difference is reported on Additional Taxes Line 1 of Form 6251. This result ensures the IRS collects the correct amount based on AMT guidelines.
Common Mistakes and How to Avoid Them
- Incorrectly adjusting itemized deductions: Many taxpayers misapply adjustments for Schedule A deductions, resulting in an inflated taxable income. You can avoid this mistake by confirming each deduction’s AMT treatment in the official instructions.
- Missing preference items: Failing to account for small business stock or drill cost adjustments can lead to discrepancies on Form 6251. You can prevent this error by reviewing all Partners’ Instructions, including Box 20, Code ZZ entries from Schedule K-1.
- Skipping capital gains adjustments: Taxpayers often apply regular tax rates instead of AMT capital gains rules. You can avoid this issue by following the 2017 AMT worksheets for capital gains and confirming whether Schedule D amounts require recalculation.
- Not applying exemption phaseout thresholds: Ignoring income thresholds leads to inflated exemption amounts. You can prevent such an error by reviewing exemption phaseout thresholds tied to your income level and verifying your numbers before filing.
- Forgetting AMT treatment for ISOs: Incentive Stock Options (ISOs) frequently cause AMT surprises when taxpayers fail to make adjustments. You can avoid this by confirming AMT adjustments for ISOs and tracking future year credits through Form 8801.
What Happens After You File
The Internal Revenue Service reviews your AMT calculation and compares it with your regular tax liability. If AMT applies, your tax return shows the added amount as part of the total tax. You should keep records because AMT payments may generate future tax credits through Form 8801. You also benefit from inflation adjustments and tax law changes introduced through the American Taxpayer Relief Act or the Tax Cuts and Jobs Act.
FAQs
How does IRS Form 6251 calculate the Alternative Minimum Tax for 2017?
IRS Form 6251 calculates AMT by adjusting taxable income using AMT rules, subtracting the exemption amount, and applying AMT tax rates. If this amount exceeds your regular tax, you pay the difference.
Does Form 6251 affect my taxable income on Form 1040?
Form 6251 does not change your taxable income on Form 1040 directly. It determines whether you owe extra tax based on AMT rules for your tax year.
How do exemption amounts work under AMT Tax Brackets?
Exemption amounts reduce AMTI before tax is calculated. These exemptions phase out at higher income thresholds, which increases AMT liability for higher earners.
What tax benefits can trigger the Alternative Minimum Tax?
Tax benefits such as incentive stock options, interest on private activity municipal bonds, Schedule A deductions, and small business stock adjustments can trigger AMT because they receive different treatment under the AMT rules.
Do inflation adjustments affect my AMT exemption amounts?
Yes, inflation adjustments applied by the Internal Revenue Service modify AMT exemption amounts, income thresholds, and other key figures for each tax year.
How do capital gains impact IRS Form 6251 calculations?
Capital gains follow a special AMT calculation method that uses AMT tax brackets. This ensures preferential rates apply under both the regular tax system and the AMT system.
Can tax software help complete IRS Form 6251?
Tax software such as TurboTax Live Full Service can assist with AMT calculations. It applies required adjustments, ensures accuracy for Form 6251 entries, and helps track future AMT credits.
