Question

What is the alternative minimum tax?

Answer 1

What Is Alternative Minimum Tax (AMT)?

An alternative minimum tax (AMT) is a tax that ensures that taxpayers pay at least the minimum. The AMT recalculates income tax after adding certain tax preference items back into adjusted gross income. AMT uses a separate set of rules to calculate taxable income after allowed deductions. Preferential deductions are added back into the taxpayer's income to calculate his or her alternative minimum taxable income (AMTI), and then the AMT exemption is subtracted to determine the final taxable figure.

How the Alternative Minimum Tax (AMT) Works

The difference between a taxpayer's AMTI and his AMT exemption is taxed using the relevant rate schedule. This yields the tentative minimum tax (TMT). If the TMT is higher than the taxpayer's regular tax liability for the year, they pay the regular tax and the amount by which the TMT exceeds the regular tax. In other words, the taxpayer pays the full TMT.

Purpose of AMT

AMT is designed to prevent taxpayers from escaping their fair share of tax liability through tax breaks. However, the structure was not indexed to inflation or tax cuts. This can cause bracket creep, a condition in which upper-middle-income taxpayers are subject to this tax instead of just the wealthy taxpayers for whom AMT was invented. In 2015, however, Congress passed a law indexing the AMT exemption amount to inflation.

Calculating AMT

To determine if they owe AMT, individuals can use tax software that automatically does the calculation, or they can fill out IRS Form 6251. This form takes medical expenses, home mortgage interest, and several other miscellaneous deductions into account to help tax filers determine if their deductions are past an overall limit set by the IRS.

The form also requests information on certain types of income such as on tax refunds, investment interest and interest from private activity bonds, as well as numbers corresponding with capital gains or losses related to the disposition of property. The IRS has specific formulas in place to determine which portion of this income and deductions the tax filers need to note on Form 6251, and it uses another set of formulas to determine how these numbers lead to AMTI.