Alternative Minimum Tax - Individuals

Changes To Note

• An 8% capital gains tax rate applies to qualified 5-year gain that would otherwise be taxed at 10%.
• The alternative minimum tax (AMT) exemption amounts have been increased.
• The Job Creation and Worker Assistance Act of 2002 (the Act) allows a special depreciation allowance for qualified property placed in service after September 10, 2001. No AMT adjustment is required for any property that qualifies for the special allowance. See What Depreciation Is Not Refigured for the AMT? on page 2.
• Under the Act, your 2001 alternative tax net operating loss deduction (ATNOLD) is generally limited to your alternative minimum taxable income (figured without regard to the ATNOLD). For details and exceptions, see the instructions for line 20 on page 6.

  Note: As a result of the two changes made by the Act, these 2001 Instructions for Form 6251 have been revised. No changes have been made to the 2001 Form 6251. If either change made by the Act affects your 2001 AMT liability and you already filed your tax return, you must file an amended return.

Purpose of Form

The tax laws give special treatment to some types of income, allow special deductions for some types of expenses, and allow credits to certain taxpayers. These laws enable some taxpayers with substantial economic income to significantly reduce their regular tax. The AMT ensures that these taxpayers pay at least a minimum amount of tax. Use Form 6251 to figure the amount, if any, of your AMT and to figure any credit limitations (see below).

Who Must File

Attach Form 6251 to your return if:

• Line 24 is greater than line 27,
• You claim any general business credit, the qualified electric vehicle credit, the nonconventional source fuel credit, or the credit for prior year minimum tax, or
• The total of lines 7 through 14 is negative and line 24 would exceed line 27 if you did not take lines 7 through 14 into account.

Recordkeeping

For the AMT, certain items of income, deductions, etc., receive different tax treatment than for the regular tax. Therefore, you need to refigure items for the AMT that you figured for the regular tax. In some cases, you may wish to do this by completing the applicable tax form a second time. If you do complete another form, do not attach it to your tax return (except for Form 1116, Foreign Tax Credit - see the instructions for line 25 on page 7), but keep it for your records.

For the regular tax, some deductions and credits may result in carrybacks or carryforwards to other tax years. Examples are investment interest expense, a net operating loss, a capital loss, and the foreign tax credit. Because you may have to refigure these items for the AMT, the carryback or carryforward amount may be different for the AMT than for the regular tax. Therefore, you must keep records of these different amounts.

Partners and Shareholders

If you are a partner in a partnership or a shareholder in an S corporation, see Schedule K-1 and its instructions to figure your adjustments or preferences from the partnership or S corporation to include on Form 6251.

Nonresident Aliens

If you are a nonresident alien and you disposed of U.S. real property interests at a gain, you must make a special computation. Fill in Form 6251 through line 23. If your net gain from the disposition of U.S. real property interests and the amount on line 21 are both greater than the tentative amount you figured for line 23, replace the amount on line 23 with the smaller of that net gain or the amount on line 21. Also, write RPI on the dotted line next to line 23. Otherwise, do not change line 23.

Note: If you are filing Form 1040NR, treat any reference in these instructions or on Form 6251 to a line on Form 1040 as a reference to the corresponding line on Form 1040NR.

Credit for Prior Year Minimum Tax

See Form 8801, Credit for Prior Year Minimum Tax - Individuals, Estates, and Trusts, if you paid AMT for 2000 or you had a minimum tax credit carryforward on your 2000 Form 8801. If you pay AMT for 2001, you may be able to take a credit on Form 8801 for 2002.

Optional Write-Off for Certain Expenditures

There is no AMT adjustment for the following items if you elect for the regular tax to deduct them ratably over the period of time shown.

• Circulation expenditures - 3 years (section 173).
• Research and experimental expenditures - 10 years (section 174(a)).
• Mining exploration and development costs - 10 years (sections 616(a) and 617(a)).
• Intangible drilling costs - 60 months (section 263(c)).

See section 59(e) for more details.

Your regular tax may be smaller if you claim a standard deduction on Form 1040 instead of itemizing deductions. However, if you owe AMT, the amount of your total tax (regular tax plus AMT) may be smaller if you itemize your deductions on both Form 1040 and Form 6251. You may not use the standard deduction to complete Form 1040 and also use itemized deductions to complete Form 6251.

Part I - Alternative Minimum Taxable Income (AMTI)

To avoid duplication, any adjustment or preference for line 5, 11, 14h, or 14n must not be taken into account in figuring the amount to enter for any other adjustment or preference.

Line 3 - Taxes

Do not include any generation-skipping transfer taxes on income distributions.

Line 4 - Certain Home Mortgage Interest

Include on this line home mortgage interest from line 10, 11, or 12 of Schedule A (Form 1040) except for interest on a mortgage whose proceeds were used to:

1. Buy, build, or substantially improve (a) your main home or (b) your second home that is a qualified dwelling (as defined below) or
2. Refinance a mortgage that meets the requirements of 1 above, but only to the extent that the refinanced amount did not exceed the balance of that mortgage immediately before the refinancing.

Exception. If the mortgage was taken out before July 1, 1982, do not include interest on the mortgage if it was secured by property that was your main home or a qualified dwelling used by you or a member of your family at the time the mortgage was taken out. See section 56(e)(3).

A qualified dwelling is any house, apartment, condominium, or mobile home not used on a transient basis.

Line 6 - Refund of Taxes

Include any refund from line 10 of Form 1040 that is attributable to state or local income taxes deducted after 1986.

Also include any refunds received in 2001 and included in income on Form 1040, line 21, that are attributable to state or local personal property taxes, foreign income taxes, or state, local, or foreign real property taxes deducted after 1986. If you include such amounts, you must write a description and the amount next to the entry space for line 6. For example, if you include a refund of real property taxes, write real property and the amount next to the entry space.

Line 7 - Investment Interest

If you completed Form 4952, Investment Interest Expense Deduction, figure your AMT investment interest expense on another Form 4952 as follows.

Step 1. Follow the Form 4952 instructions for line 1, but also include the following amounts when completing line 1.

• Any interest expense on line 4 of Form 6251 that was paid or accrued on indebtedness attributable to property held for investment within the meaning of section 163(d)(5).

  Example. Interest on a home equity loan whose proceeds were invested in stocks or bonds.

• Any interest that would have been deductible if interest earned on private activity bonds issued after August 7, 1986, had been includible in gross income.

Step 2. Enter your AMT disallowed investment interest expense from 2000 on line 2. Complete line 3.

Step 3. When completing Part II, refigure the following amounts, taking into account all adjustments and preferences.

• Gross income from property held for investment.
• Net gain from the disposition of property held for investment.
• Investment expenses.

Include any interest income and investment expenses from private activity bonds issued after August 7, 1986.

Step 4. Complete Part III.

Enter on line 7 the difference between line 8 of your AMT Form 4952 and line 8 of your regular tax Form 4952. If your AMT expense is greater, enter the difference as a negative amount.

Note: If you did not itemize deductions and you had investment interest expense, do not enter an amount on line 7 unless you reported investment interest expense on Schedule E. If you did, follow the steps above for completing Form 4952. Allocate the investment interest expense allowed on line 8 of the AMT Form 4952 in the same way you did for the regular tax. Enter on line 7 the difference between the amount allowed on Schedule E for the regular tax and the amount allowed on Schedule E for the AMT.

Line 8 - Post-1986 Depreciation

This section describes when depreciation must be refigured for the AMT and how to figure the amount to enter on line 8.

Do not use line 8 for depreciation related to the following.

• Employee business expenses claimed on line 20 of Schedule A (Form 1040). Take this adjustment into account on line 5.
• Passive activities. Take this adjustment into account on line 11.
• An activity for which you are not at risk or income or loss from a partnership or an S corporation if the basis limitations apply. Take this adjustment into account on line 14h.
• A tax shelter farm activity. Take this adjustment into account on line 14n.

What Depreciation Must Be Refigured for the AMT?

Generally, you must refigure depreciation for the AMT, including depreciation allocable to inventory costs, for:

• Property placed in service after 1998 that is depreciated for the regular tax using the 200% declining balance method (generally 3-, 5-, 7-, and 10-year property under the modified accelerated cost recovery system (MACRS));
• Section 1250 property placed in service after 1998 that is not depreciated for the regular tax using the straight line method; and
• Tangible property placed in service after 1986 and before 1999 (if the transitional election was made under section 203(a)(1)(B) of the Tax Reform Act of 1986, this rule applies to property placed in service after July 31, 1986).

What Depreciation Is Not Refigured for the AMT?

Do not refigure depreciation for the AMT for the following.

• Residential rental property placed in service after 1998.
• Nonresidential real property with a class life of 27.5 years or more placed in service after 1998 that is depreciated for the regular tax using the straight line method.
• Other section 1250 property placed in service after 1998 that is depreciated for the regular tax using the straight line method.
• Property (other than section 1250 property) placed in service after 1998 that is depreciated for the regular tax using the 150% declining balance method or the straight line method.
• Property for which you elected to use the alternative depreciation system (ADS) of section 168(g) for the regular tax.
• Property that is qualified property under section 168(k)(2) (property eligible for the special depreciation allowance). The special allowance is deductible for the AMT, and there also is no adjustment required for any depreciation figured on the remaining basis of the qualified property. Property for which an election is in effect under section 168(k)(2)(C)(iii) to not have the special allowance apply is not qualified property. See the Instructions for Form 4562 for the definition of qualified property.
• Any part of the cost of any property for which you made the election under section 179 to treat the cost of the property as a deductible expense. The reduction to the depreciable basis of section 179 property by the amount of the section 179 expense deduction is the same for the regular tax and the AMT.
• Motion picture films, videotapes, or sound recordings.
• Property depreciated under the unit-of-production method or any other method not expressed in a term of years.
• Qualified Indian reservation property.

How Is Depreciation Refigured for the AMT?

Property placed in service before 1999. Refigure depreciation for the AMT using ADS, with the same convention used for the regular tax. See the table below for the method and recovery period to use.

Property Placed in Service Before 1999

Property placed in service after 1998. Use the same convention and recovery period used for the regular tax. For property other than section 1250 property, use the 150% declining balance method, switching to straight line the first tax year it gives a larger deduction. For section 1250 property, use the straight line method.

Note: If you did not make this adjustment in 1999 or 2000 for section 1250 property placed in service after 1998 that was not depreciated for the regular tax using the straight line method, you must file an amended return if you are required to file Form 6251 for that year (after taking this adjustment into account).

How Is the AMT Class Life Determined?

The class life used for the AMT is not necessarily the same as the recovery period used for the regular tax. The class lives for the AMT are listed in Rev. Proc. 87-56, 1987-2 C.B. 674, and in Pub. 946, How To Depreciate Property. Use 12 years for any tangible personal property not assigned a class life.

See Pub. 946 for optional tables that may be used to figure AMT depreciation. Rev. Proc. 89-15, 1989-1 C.B. 816, has special rules for short years and for property disposed of before the end of the recovery period.

How Is the Adjustment To Enter on Line 8 Figured?

Subtract the AMT deduction for depreciation from the regular tax deduction and enter the result. If the AMT deduction is more than the regular tax deduction, enter the difference as a negative amount.

In addition to the AMT adjustment to your deduction for depreciation, you must also adjust the amount of depreciation that was capitalized, if any, to account for the difference between the rules for the regular tax and the AMT. Include on this line the current year adjustment to taxable income, if any, resulting from the difference.

Line 9 - Adjusted Gain or Loss

Use this line to report any AMT adjustment resulting from refiguring:

• Gain or loss from the sale, exchange, or involuntary conversion of property reported on Form 4797, Sales of Business Property;
• Casualty gain or loss to business or income-producing property reported on Form 4684, Casualties and Thefts; or
• Capital gain or loss (including any carryover that is different for the AMT) reported on Schedule D (Form 1040), Capital Gains and Losses.

The $3,000 capital loss limitation for the regular tax applies
separately to any capital loss as refigured for the AMT. See the
example below.

Refigure the gain or loss reported on your return from the above forms by taking into account any AMT adjustments you made this year or in previous years that affect your adjusted basis. Enter on line 9 the difference between the gain or loss, if any, reported for the regular tax and that figured for the AMT. If (a) the AMT gain is less than the regular tax gain, (b) the AMT loss is more than the regular tax loss, or (c) you have an AMT loss and a regular tax gain (or no gain or loss for the regular tax), enter the difference as a negative amount.

Example. In January 2000, Victor Ash exercised an incentive stock option. He paid $10,000 for stock worth $100,000. The $90,000 difference between his cost and the value of the stock is not taxable for the regular tax. His regular tax basis in the stock at the end of the year is $10,000. For the AMT, however, the $90,000 difference is an adjustment that must be included on line 10 of his 2000 Form 6251. His AMT basis in the stock at the end of 2000 is $100,000.

In February 2001, the stock's value had dropped, and Victor sold it for $60,000. For the regular tax, he has a capital gain of $50,000 ($60,000 sales price minus his regular tax basis of $10,000). For the AMT, Victor has a capital loss of $40,000 ($60,000 sales price minus his AMT basis of $100,000). The AMT capital loss allowed for the year, however, is limited to $3,000. Victor has no other capital transactions for 2001. He includes on line 9 an adjusted loss of ($53,000), which is the difference between the ($3,000) capital loss he is allowed for the AMT and the $50,000 capital gain net income reported on Schedule D for the regular tax.

Victor has an AMT long-term capital loss carryover from 2001 to 2002 of $37,000. If Victor has no other Schedule D transactions for 2002, his adjusted loss reported on line 9 of Form 6251 will be ($3,000). Victor will then have an AMT long-term capital loss carryover from 2002 to 2003 of $34,000.

For the regular tax, no income is recognized when an incentive stock option (ISO), as defined in section 422(b), is exercised. However, this rule does not apply for the AMT. Instead, you generally must include on line 10 the excess, if any, of:

• The fair market value of the stock acquired through exercise of the option (determined without regard to any lapse restriction) when your rights in the acquired stock first become transferable or when these rights are no longer subject to a substantial risk of forfeiture over
• The amount you paid for the stock, including any amount you paid for the ISO used to acquire the stock.

Note: Even if your rights in the stock are not transferable and are subject to a substantial risk of forfeiture, you may elect to include in AMT income the excess of the stock's fair market value (determined without regard to any lapse restriction) over the exercise price upon the transfer to you of the stock acquired through exercise of the option. You must make the election by the 30th day after the date of the transfer. See Pub. 525 for more details.

If you acquired stock by exercising an ISO and you disposed of that stock in the same year, the tax treatment under the regular tax and the AMT is the same, and no adjustment is required.

Increase your AMT basis in any stock acquired through the exercise of an ISO by the amount of the adjustment. Keep adequate records for both the AMT and regular tax so that you may figure your adjusted gain or loss in the year you sell the stock. See the instructions for line 9.

Your passive activity gains and losses must be refigured for the AMT by taking into account all adjustments and preferences and any AMT prior year unallowed losses that apply to that activity. You may fill out a second Form 8582, Passive Activity Loss Limitations, and the other forms or schedules on which your passive activities are reported, to determine your passive activity loss allowed for the AMT, but do not file the second set of forms and schedules with your tax return.

• A passive activity loss of $4,125,
• A depreciation adjustment of $500 on post-1986 property, and
• An adjustment of $225 for adjusted gain or loss.

Because the two adjustments above are not allowed for the AMT, you must first reduce the passive activity loss by those amounts. The result is a passive activity loss for the AMT of $3,400. You then enter this amount on Worksheet 2 of the AMT Form 8582 and refigure the allowable passive activity loss for the AMT.

Note: The amount of any AMT passive activity loss that is not deductible and is carried forward is likely to differ from the regular tax amount, if any. Therefore, keep adequate records for both the AMT and regular tax.

Enter the difference between the amount that would be reported for the activity on Schedule C, C-EZ, E, or F or Form 4835, Farm Rental Income and Expenses, for the AMT and the regular tax amount. If (a) the AMT loss is more than the regular tax loss, (b) the AMT gain is less than the regular tax gain, or (c) you have an AMT loss and a regular tax gain, enter the adjustment as a negative amount.

Enter any adjustment for amounts reported on Schedule D, Form 4684, or Form 4797 for the activity on line 9 instead of line 11. See the instructions for line 9.

If you had a loss from a PTP, refigure the loss using any AMT adjustments and preferences and any AMT prior year unallowed loss.

Refigure any gain or loss from a tax shelter passive farm activity taking into account all AMT adjustments and preferences and any AMT prior year unallowed losses. If the amount is a gain, include it on the AMT Form 8582. If the amount is a loss, do not include it on the AMT Form 8582. Carry the loss forward to 2002 to see if you have a gain or loss from tax shelter passive farm activities for 2002.

If at the end of the tax year your liabilities exceed the fair market value of your assets, increase your passive activity loss allowed by that excess (but not by more than your total loss). See section 58(c)(1).

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