What is an 'Alternative Minimum Tax - AMT'

An alternative minimum tax (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 alternative minimum taxable income (AMTI), then the AMT exemption is subtracted to determine the final taxable figure.

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

AMT Exemption Amounts

The AMT exemption amount is the amount of AMTI that is exempted from AMT. As of 2017, the AMT exemption for individual taxpayers is $54,300. As a result, if an individual taxpayer completes Form 6251 and discovers his AMTI is $100,000, he typically has to pay AMT, but first, he gets to subtract the exemption amount, making his taxable amount only $45,700. In contrast, if his AMTI is only $40,000, that is less than the exemption, and he does not have to pay AMT.

It's important to note thought that Taxpayers with AMTI over a certain threshold do not qualify for the AMT exemption. For more information, see the IRS's website.

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 where upper-middle-income taxpayers are subject to this tax instead of the wealthy taxpayers for which 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 which 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, and it helps 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 related to capital gains or losses related to the disposition of property. The IRS has specific formulas in place to determine which portion of these 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.

BREAKING DOWN 'Alternative Minimum Tax - AMT'

RELATED TERMS
  1. Form 6251: Alternative Minimum ...

    A tax form distributed by the Internal Revenue Service (IRS) ...
  2. Tax Preference Item

    A type of income, normally tax-free, that may trigger the alternative ...
  3. Tax Exempt

    To be free from, or not subject to, taxation by regulators or ...
  4. Tax Base

    The assessed value of a set of assets, investments or income ...
  5. Alternative Tax Net Operating Loss ...

    The excess of deductions allowed over the income recognized for ...
  6. IRS Publication 514

    A document published by the Internal Revenue Service that provides ...
Related Articles
  1. Taxes

    How to Cut Your Alternative Minimum Tax

    Should you worry about the AMT? Even if you're subject to it, there are exemptions and strategies for reducing your tax bill.
  2. Taxes

    Can Trump Kill the Alternative Minimum Tax (AMT)?

    Getting rid of the AMT would be great for upper-middle class taxpayers.
  3. Taxes

    Cut Employee Stock Option Taxes With AMT Credit

    Learn how refundable AMT credits can help you save on taxes, AMT bills and more.
  4. Taxes

    End-of-the-Year Checklist to Save on Income Taxes

    From grouping related expenses to factoring in the alternative minimum tax, here are some things you need to keep in mind when doing tax planning.
  5. Taxes

    What's IRS Form 1040 For?

    Most U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.
  6. Taxes

    Valuable Year-End Tax Moves for 2016 (Part Three)

    Here's a look at tax strategies for itemized deductions, charitable gifts and other tax credits.
  7. Taxes

    Tax Credits And Deductions For Parents

    Your children can help you save on your taxes with these credits and deductions.
  8. Taxes

    The History Of Taxes In The U.S.

    The number of taxes that we now consider a given did not always exist. Find out how they arose.
  9. Retirement

    Is there any way to opt out of paying Social Security?

    Understand more about the purpose of the Social Security system and learn which groups of taxpayers are automatically exempt from the tax.
RELATED FAQS
  1. What’s the difference between IRS Forms 1040 and 1040EZ?

    Though very similar, the differences between the 1040 and 1040EZ Forms are significant when it comes to filing your tax return. ... Read Answer >>
  2. How can I lower my effective tax rate without lowering my income?

    Discover how to reduce your effective tax rate without losing income by maximizing adjustments and deductions, earning tax-free ... Read Answer >>
  3. What deductions, credits and exemptions depend on gross income calculations?

    Understand what deductions, exemptions and tax credits are dependent on the gross income calculation and how these determine ... Read Answer >>
  4. How do I know whether to itemize deductions or take the standard deduction?

    Taking the standard deduction is the easiest and most common method chosen by filers, but many taxpayers may wind up paying ... Read Answer >>
Hot Definitions
  1. Five Cs Of Credit

    A method used by lenders to determine the credit worthiness of potential borrowers. The system weighs five characteristics ...
  2. Straddle

    An options strategy in which the investor holds a position in both a call and put with the same strike price and expiration ...
  3. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  4. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  5. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  6. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
Trading Center