AMT Exclusion Items vs. Deferral Items

The AMT is caused by two types of adjustments and preferences—deferral items and exclusion items. Deferral items (e.g., depreciation, passive activity losses, etc.) generally do not cause a permanent difference in taxable income over time because taxable income differences caused by deferral items are a matter of timing. Unlike deferral items, exclusion items do cause a permanent difference in regular taxable income and alternative minimum taxable income. Permanent differences involve:

  • items that can be deducted for regular income tax purposes, but not for AMT purposes
  • items that are not included in regular income, but are included for AMT purposes.

Deferral Item Example

Accelerated depreciation over the life of §1250 property placed in service before 1999 will result in the same deduction amount provided by straight-line depreciation over the property’s useful life but the accelerated depreciation is a positive adjustment to AMT income (i.e., it increases current year AMT income). However, if straight-line depreciation was used over the entire life of the property, in later years it will provide a larger deduction than the accelerated depreciation method causing regular income to be greater than AMT income. Because the excess depreciation was a positive adjustment to AMT income, it could have triggered an AMT liability. If it did, the previously paid AMT can be used as a credit against regular income tax liability in later years.

Exclusion Item Example

A married taxpayer takes two standard deductions on Form 1040. These deductions are allowed for regular income taxes – they are not allowed for the AMT.

Exclusion Items include

  • standard deduction
  • personal and dependency exemption for regular tax
  • Medical expenses deductible for regular tax but not AMT
  • Itemized deductions not allowed for AMT
  • percentage depletion in excess of adjusted basis
  • Tax exempt interest on certain private activity bonds
  • §1202 exclusion for small business stock - see Section 1244 stock (small business stock election)

Note: Lines 2-5, 8-10, 13 and 14 of Form 6251 (2013) are exclusion items. If you paid AMT based on entries on these lines, you will not receive a tax credit for AMT. Lines 15-28 are deferral items.

Applicability of the AMT credit

So…what’s the big deal as to whether an adjustment or preference is either a deferral item or an exclusion item?!? The AMT credit (see AMT Credits: creation, usage, and limitations ) is allowed only for the AMT caused by deferral items (where the difference between the regular income tax deduction and the AMT deduction is simply a matter of timing); not exclusion items (which cause a permanent difference between AMT income and regular income). In other words, if an AMT liability must be paid no AMT credit is allowed to the extent it is attributable to exclusion items.

Bookstore: Books on the alternative minimum tax (AMT)

Also see:

AMT Mechanics

AMT Preferences and adjustments

AMT Credits: creation, usage, and limitations

AMT Application to businesses and trusts

AMT Planning strategies