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The alternative minimum tax (AMT) is a separate way to calculate taxes that makes sure high-income earners pay at least a minimum amount, even if they claim many deductions or credits. In 2025, the AMT exemption is $88,100 for single filers and $137,000 for married couples filing jointly. These amounts start to phase out if income is over $626,350 for singles or $1,252,700 for joint filers. A financial advisor can help you figure out if the AMT affects you and plan for it.

","

About Alternative Minimum Tax (AMT)

","

The AMT operates as a separate tax framework aimed at limiting the use of deductions and credits by high-income taxpayers to significantly lower their tax obligations. It was introduced in 1969 in response to concerns that some wealthy individuals were paying little to no federal income tax.

","

Unlike the regular tax system, which allows various deductions and exemptions, AMT recalculates taxable income by adding back certain tax preferences, such as state and local tax (SALT) deductions and particular business net operating losses.

","

AMT applies only if the recalculated tax liability exceeds what a taxpayer would owe under the standard tax system. If so, the taxpayer must pay the higher amount. This system primarily affects individuals with high incomes, large capital gains or substantial deductions.

","

To adjust for inflation, AMT includes an exemption amount, which phases out at higher income levels. While fewer taxpayers are subject to AMT today due to automatic inflation adjustments, it still impacts those with complex financial situations.

","

What Are the AMT Tax Brackets?

","

AMT uses a separate set of tax brackets from the regular income tax system. Instead of progressive marginal rates that increase with income, AMT applies only two tax rates: 26% and 28%. The first $239,100 of taxable AMT income ($119,550 for married couples filing separately) is taxed at 26%, while any amount above either of those amounts is taxed at 28%.

","

This separate tax system also includes exemption amounts, which reduce the portion of income subject to the tax. For 2025, the exemption is $137,000 for married couples filing jointly and $88,100 for single filers. However, the exemption begins to decrease once a taxpayer’s alternative minimum taxable income (AMTI) surpasses a specific threshold, which is adjusted for inflation annually. The exemption is completely eliminated once AMTI hits a secondary threshold, which is also subject to annual inflation adjustments.

","

Since AMT calculations remove certain deductions allowed under the standard tax system, taxpayers must determine whether their adjusted income pushes them into this separate tax structure.

","

How AMT Exemption Phaseouts Work

","

","

The alternative minimum tax exemption reduces the portion of income subject to AMT, but this benefit phases out at higher income levels. For 2025, the exemption begins to decrease once a taxpayer’s AMTI surpasses a specific threshold: $1,252,700 for married couples filing jointly and $626,350 for single filers. The phaseout mechanism reduces the exemption by 25 cents for every dollar of AMTI above these thresholds.

","

If AMTI reaches the complete phaseout threshold—$1,800,700 for joint filers and $978,750 for single taxpayers—the exemption is eliminated entirely, meaning all AMTI is subject to AMT rates. This phaseout structure significantly increases AMT liability for high earners, as it effectively subjects more income to the 26% and 28% AMT rates, making tax planning an important consideration for those near or above the phaseout range.

","

For example, a single filer with an AMTI of $1 million exceeds the $626,350 phaseout threshold by $373,650. The exemption is reduced by 25% of that amount, or $93,412.50. Since the full exemption for single filers is $88,100, this reduction eliminates the exemption entirely, meaning the taxpayer’s entire AMTI is subject to AMT rates.

","

Now imagine a second single filer with an AMTI of $800,000. Since their AMTI exceeds the $626,350 threshold by $173,650, their exemption is reduced by 25% of that amount, or $43,412.50, leaving a final exemption of $44,687.50 ($88,100 – $43,412.50). While some exemption remains, a significant portion of income is still subject to AMT rates, demonstrating how the phaseout gradually increases taxable AMTI.

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Calculating Your AMT

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AMT liability is determined by applying AMT tax rates to AMTI after adjusting for the exemption. Once the exemption is reduced or eliminated based on income, the remaining taxable AMTI is subject to either 26% or 28% tax rates.

","

For the hypothetical single filer with $1 million in AMTI, the exemption is completely phased out. The first $239,100 of taxable AMTI is taxed at 26%, resulting in $62,166 in tax. The remaining $760,900 is taxed at 28%, adding $213,052 in tax. The total tentative AMT is $275,218. If this amount exceeds the taxpayer’s regular income tax, the difference must be paid as AMT.

","

For the single filer with $800,000 in AMTI, the reduced exemption of $44,687.50 is subtracted, leaving a taxable AMTI of $755,312.50. The first $239,100 is taxed at 26% ($62,166), and the remaining $516,212.50 is taxed at 28% ($144,539.50), totaling $206,705.50 in tentative AMT. Again, comparing this amount to the regular tax liability determines whether additional AMT applies.

","

Bottom Line

","

","

The alternative minimum tax (AMT) is a separate tax rule that some high-income earners must follow. It takes away some deductions and uses different tax rates. Fewer people owe AMT now because of inflation adjustments, but it can still affect those with large deductions, capital gains, or stock options. If your income is high, your AMT exemption may shrink, which can increase your taxes.

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Tax Planning Tips

","$48","

Photo credit: ©iStock.com/Deagreez, ©iStock.com/milan2099, ©iStock.com/damircudic

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Imputed interest rules can turn even a simple act of generosity into a taxable event. This IRS regulation requires interest to be calculated and reported on certain transactions, even if no interest is explicitly stated. The regulation aims to ensure fair taxation on transactions involving deferred payments or below-market interest rates. As tax laws continue […]

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","

What Is Imputed Interest?

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Imputed interest is a term used by tax authorities to assign an interest income or expense to financial dealings that either lack explicit interest charges or have interest rates below the market standard.

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For example, when a parent lends money to their child without interest, or when a business permits a buyer to pay for goods in installments free of interest, the IRS may apply imputed interest.

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The goal is to estimate the interest that would have accrued if the loan or sale were conducted at the current market rate. This allows tax authorities to impose tax rules on what they consider the ‘fair’ interest income for the lender or the implied interest expense for the borrower.

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Here are three types of loans commonly affected:

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Gift loans: Money lent without expectation of repayment or at below-market interest rates.
Demand loans: Loans that can be called for repayment at any time by the lender.
Term loans: Loans that have a set repayment schedule over a certain period.

","

The IRS uses the AFR, updated monthly, to establish the minimum interest rate for these transactions, ensuring that people adhere to these guidelines and avoid potential tax issues.

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Understanding Imputed Interest and Taxes

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When imputed interest is confirmed, the IRS might apply a deemed interest rate to your loan, treating the transaction as if you had agreed to a loan at the fair market rate of interest. This is to ensure that the government can collect tax on the hypothetical interest that would have been generated had the loan been made at market rates, preventing what could be seen as an attempt to transfer wealth without paying taxes on it.

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Imputed interest has significant tax ramifications for lenders and possibly borrowers in some cases. These rules are defined by the IRS through AFRs, which are the minimum interest rates that should be applied to various types of loans. If you lend money at an interest rate lower than the specified AFRs, both parties may be required to report the imputed interest as taxable income. If this is unexpected then it can be quite costly, especially in a situation where something is assumed to be a gift.

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How to Calculate Imputed Interest

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The process of calculating imputed interest starts with identifying the applicable federal rate (AFR) set by the IRS. The AFR, updated monthly, is the minimum interest rate that should be used for private loans and varies based on the loan’s duration. One can find the current AFR on the IRS website or in their official publications.

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The imputed interest is the difference between the AFR and the interest rate actually charged by the lender. As an example, let’s consider the following loan:

","

Loan Principal: $10,000
AFR: 3% (annual rate)
Interest Actually Paid: $200

","

To calculate the imputed Interest, you would multiply the loan principal ($10,000) by the AFR (3%), then subtract the interest actually paid (- $200). This would come out to $100 ($300 – $200).

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Exemptions to Imputed Interest

","

","

There are several exemptions within the Internal Revenue Code (IRC) that permit certain loans to be made without adhering to the AFRs or recognizing taxable interest income. How these rules apply will depend on the specific circumstances surrounding the loan. Here are three general exemptions:

","

Intra-family loans: If the total amount loaned does not exceed $10,000, no imputed interest income needs to be reported by the lender, provided that the loan is not used for income-generating purposes, such as investing in a business that produces income.
Small business loans: Loans that do not exceed $10,000 may fall under the same exemption, allowing flexibility for small-scale economic activities.
De minimis loans: Loans between individuals where the outstanding balance is below the $10,000 threshold are exempted, as the IRS deems the imputed interest to be negligible (de minimis).

","

Consulting with a tax professional can help determine how these exemptions apply to your specific situation. This ensures that your lending practices adhere to legal standards and do not inadvertently result in unforeseen tax liabilities.

","

Imputed Interest on a Zero-Coupon Bond

","

Zero-coupon bonds are a distinctive option within an investor’s portfolio, offering a unique structure that stands apart from traditional bonds. They are issued at a significant discount to their face value and mature to their full amount without disbursing interest periodically. This feature alone can make them an attractive consideration for a certain type of investor.

","

Interest on a zero-coupon bond is not paid out at regular intervals but is accrued or imputed over the life of the bond. This means that, for accounting and tax purposes, the bond’s value is considered to increase annually, reflective of accrued interest, despite no actual cash flow occurring until maturity.

","

When it comes to taxes, the IRS has specific rules regarding the treatment of imputed interest. According to IRS Publication 550, the imputed interest on zero-coupon bonds must be reported as income annually. This increment in taxable income may push some investors into a higher tax bracket. Therefore, investors should take this into account when managing their tax liabilities.

","

Bottom Line

","

","

From personal loans between family members to zero-coupon bonds, understanding how and when imputed interest is calculated will help you avoid potential tax consequences or penalties. The calculation of imputed interest is based on IRS guidelines, and it is specifically relevant for reporting taxable interest income on loans that have below-market interest rates.

","

Tips for Tax Planning

","$60","

Photo credit: ©iStock.com/Adene Sanchez, ©iStock.com/Morsa Images, ©iStock.com/South_agency

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Approximately 40% of households pay taxes on their Social Security benefits, according to the Social Security Administration. If you do owe taxes on your benefits, managing them effectively could save you a lot of money. If you need help planning for Social Security or taxes in retirement, consider working with a financial advisor. However, there […]

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Patrick studied English at the University of New Hampshire and currently holds the Certified Educator in Personal Finance (CEPF) designation. \r\n\r\nPrior to joining SmartAsset, Patrick was a senior writer at MagnifyMoney, where he covered investing. His career began in journalism and included 11+ years at The Jersey Journal, where he covered sports and news as an editor. His work has appeared on Yahoo Finance, MSN, NJ.com, and The Star-Ledger. 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","

If you need help planning for Social Security or taxes in retirement, consider working with a financial advisor.

","

However, there aren’t many ways to do that. Social Security taxes are based on a rather straightforward income formula. The only real ways to reduce how much of your benefits are taxable is to reduce your taxable income or qualify for a lower marginal tax rate.

","

For example, say that you expect to earn $3,300 per month from Social Security. Here’s how your taxes will work and how you may be able to reduce taxes on those payments.

","

How Are Social Security Benefits Taxed?

","

","

Depending on your income, a percentage of your Social Security benefits may be included in your taxable income. This usually applies when you have additional income beyond your Social Security benefits, although particularly high-earners can trigger taxes based on their benefits alone.

","

Benefits taxes are calculated using two separate figures: combined income and taxable income. Your combined income is used to determine the amount of Social Security benefits subject to taxation. Your taxable income is a separate figure used to determine your actual taxes.

","

Combined Income

","

First, you calculate your combined income:

","

Combined Income = adjusted gross income + nontaxable Interest + half of our Social Security benefits

","

So, in our example, you have $39,600 per year in Social Security income. Absent any other income, that gives you a starting combined income of $19,800.

","

If your combined income is less than $25,000 as an individual or $32,000 as a married couple, you will not pay taxes on your Social Security benefits. If your combined income is between $25,000 and $34,000 as an individual or between $32,000 and $44,000 as a married couple, you pay taxes on up to 50% of your benefits. This can be a sliding scale. Your exact rate will be determined using IRS Publication 915.

","

If your combined income is above $34,000 as an individual or above $44,000 as a married couple, you pay taxes on up to 85% of your Social Security benefits. Again, this can be a sliding scale.

","

Taxable Income

","

Once you know your benefits tax tier, you can calculate your taxable income.

","

To do this, you multiple your tax tier (0%, 50% or 85%) times your total Social Security benefits. Then, you add the resulting amount to the rest of your taxable income. Your taxes will then be based on this total.

","

The result of this system is that some of your benefits will be taxed and some will not be. For example, say you are in the 85% bracket. In this case, you will add 85% of your benefits to your taxable income, and you will not pay taxes on 15% of your benefits.

","

Like with most retirement income, benefits are not subject to FICA (payroll) taxes, so you will only pay income taxes on this money.

","

Social Security Benefits Taxes Examples

","

Let’s look at our hypothetical scenario using three different examples. (You can also run your own numbers through the IRS benefits tax calculator.) We’ll assume you’re single.

","

Example 1: Social Security as Your Only Income Source

","

Here, you have only Social Security benefits ($39,600) and no other sources of retirement income. Your taxes would be based in the following inputs:

","

Combined Income: $0 + $0 + (0.5 * $39,600) = $19,800
Social Security Tax Tier: 0%

","

Ordinarily, with $19,800 of income you would pay $595 in federal taxes (absent any special credits or deductions). However, your combined income falls below the $25,000 threshold, so none of your benefits are taxable. As a result, you would have no taxable income and pay no federal income tax.

","

Example 2: $12,000 in 401(k) Withdrawals

","

Here, you have Social Security benefits plus an additional $12,000 per year from your 401(k). Your taxes would be based on the following:

","

Combined Income: $12,000 + $0 + (0.5 * $39,600) = $31,800
Social Security Tax Tier: 50%

","

Since your combined income is between $25,000 and $34,000 as an individual, 50% of your Social Security benefits would be added to your taxable income. As a result, your taxable income would be the same as your combined income, and you would owe around $1,934 in federal income tax.

","

Example 3: $50,000 in 401(k) Withdrawals

","

In our third scenario, you have Social Security benefits plus an additional $50,000 per year from your 401(k). Your taxes would be calculated based on the following:

","

Combined Income: $50,000 + $0 + (0.5 * $39,600) = $69,800
Social Security Tax Tier: 85%

","

Since your combined income is above $34,000 as an individual, you would pay taxes on 85% of your Social Security benefits. As a result, your taxable income would be $83,575 ($50,000 + $33,660) and you would owe around $10,666 in federal income tax.

","

Keep in mind that these are estimates. If you need help calculating your own tax liability, consider working with a financial advisor with tax expertise.

","

Reducing Your Social Security Benefits Taxes

","

","

So, how can you reduce the taxes on your Social Security benefits?

","

Overall, the only way to reduce the taxes you pay on Social Security benefits is to reduce either your taxable income, your marginal tax rate or both.

","

It’s important to note that you can help manage the impact of these taxes by requesting federal withholding. If you do this, the SSA will withhold your likely taxes from each benefits check, helping you to avoid a nasty income tax bill when you file your tax return for the year.

","

Beyond that, here a few strategies for reducing your tax liability:

","

Roth Conversions

","

This is perhaps the most straightforward option. Income that you generate from a Roth IRA does not count as taxable income and is also not subject to required minimum distributions (RMDs). Since Roth withdrawals aren’t part of your adjusted gross income, they’re also not calculated in your combined income for benefits tax purposes. As a result, if you generate most or all of your income from Roth withdrawals, your Social Security benefits may not be subject to any significant taxation (depending on your benefit amount).

","

That said, remember that Roth conversions have a hefty up-front tax cost. For households near or in retirement, converting a significant amount from a pre-tax portfolio may leave you paying more in taxes on the conversion than what you would save on your Social Security taxes. If you need help calculating how much your savings you should convert into a Roth IRA, consider speaking with a financial advisor.

","

Capital Gains Conversions

","

This is an equivalent to Roth conversions, but generally less advantageous.

","

Here, you would move your money from a pre-tax retirement account into a taxable brokerage account. From there, your withdrawals may be subject to a mix of capital gains and income taxes depending on the nature and duration of your investments. However, returns subject to capital gains taxes will not count toward your combined income, again giving you an advantage when it comes to calculating the proportion of benefits subject to taxation.

","

However, you will still pay up-front taxes on the money you move out of your pre-tax portfolio. For this reason, households may do better with a Roth conversion (which eliminates taxes altogether) than a capital gains conversion (which restructures taxes).

","

Structure Your Withdrawals

","

Finally, you can structure your withdrawals around the benefit tax tiers.

","

While even a small amount of additional income can push you into the 85% bracket, it can be very useful to manipulate your income around these tax tiers.

","

The key here is to remember two things. First, money in savings does not count as income for tax purposes. Second, the tax tiers apply to your entire benefits check. The idea, then, is that you can withdraw extra money above a tier in one year, set it aside in savings, then withdraw less for several additional years.

","

The goal is to keep your combined income in the 0% or 50% brackets as often as possible. The cost, however, is that you lose out on any investment returns for the money that sits in savings.

","

Say that in general you want to take $15,000 from your 401(k). On its own this would give you a combined income of $34,800 ($15,000 + $19,800), so you would pay taxes on 85% of your benefits. Instead, in one year you could withdraw $20,000, still paying taxes on 85% of your benefits. Then, for the next four years, you could withdraw $14,000 from your portfolio and $1,000 from savings. That would give you a combined income of $33,800, so for those four years you would only pay taxes on 50% of your benefits.

","

This kind of structured withdrawal is difficult to manage, particularly in the long run. It may be best executed with the help of a financial advisor, one who can help you prepare this kind of tax planning years ahead of time.

","

Bottom Line

","

Social Security benefits are taxed based on how much overall income you have. The only real way to reduce those taxes is to lower your tax rate or reduce your income, which is often best done with either a Roth IRA or structured withdrawals.

","

Social Security Benefits Tips

","$73","

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A backdoor Roth IRA typically offers high-income earners a workaround to contribute directly to a Roth IRA when their earnings are above IRS income limits. This strategy could allow you to take advantage of tax-free growth and withdrawals in retirement. Reporting a backdoor Roth IRA contribution on your taxes is relatively straightforward. But doing it […]

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Jeff has received his JD and MBA and has been featured in a number of publications, such as Investopedia, The Street, Forbes, Yahoo! Finance and more. 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","

What Is a Backdoor Roth IRA?

","

For many individuals, the Roth IRA is a desirable choice due to its tax-free growth and withdrawals. However, not everyone can contribute directly to a Roth IRA as there are income limits that restrict high earners. In 2024, single filers must earn less than $146,000 to contribute to a Roth IRA (up to $240,000 for married couples filing jointly). Once your income surpasses these thresholds, you’re no longer eligible to contribute directly to a Roth IRA.

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This is where the backdoor Roth IRA comes into play. It’s a strategy used by those who earn too much to qualify for direct Roth IRA contributions. The process begins with making a non-deductible contribution to a traditional IRA, which doesn’t have income limits for contributions. Then, you can convert the traditional IRA to a Roth IRA, which is allowed regardless of your income level.

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While this strategy can offer you tax-free investment growth and withdrawals in retirement, these benefits are most advantageous based on your current and expected future tax situations. Additionally, Roth IRAs are not subject to required minimum distributions (RMDs) during your lifetime, which may provide you with greater flexibility and potential tax advantages.

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How to Report Your Backdoor Roth IRA

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Follow these six basic steps to report your backdoor Roth IRA:

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If you’re unsure about any aspect of reporting your backdoor Roth IRA contribution, or if you have a complex financial situation, you want to consult a tax professional. They can offer you personalized advice based on your specific circumstances and help ensure that you meeting IRS requirements.

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Form 8606 and Other Required Documents

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The IRS mandates the use of Form 8606 to report nondeductible contributions to traditional IRAs and any subsequent conversions to Roth IRAs. Failure to report these transactions can lead to a 10% tax on underpaid amounts and a $50 penalty for not filing Form 8606. Furthermore, if excess contributions are not reported, individuals may face a 6% tax for each year the excess remains in their account.

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Part I in Form 8606 is used to disclose non-deductible contributions made to traditional IRAs, establishing the basis for after-tax assets in the account. Part II accounts for the conversion from a traditional IRA to a Roth IRA, and any taxable events that may arise.

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In addition to Form 8606, several other documents are indispensable for reporting a backdoor Roth IRA conversion. Here are six important forms you may need to consider:

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Traditional IRA contribution statements
1099-R forms
Brokerage account statements
Form 5498
Prior year tax returns
Records of recharacterizations

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Bottom Line

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The tax requirements for a backdoor Roth IRA involve reporting nondeductible contributions to a traditional IRA and subsequent conversions to a Roth IRA on Form 8606. Failing to do so, could cost you more money in IRS penalties and additional taxes on the converted amount.

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Tips for Tax Planning

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