Alternative Minimum Tax - AMT

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DEFINITION of 'Alternative Minimum Tax - AMT'

A tax calculation that adds certain tax preference items back into adjusted gross income. Alternative minimum tax (AMT) uses a separate set of rules to calculate taxable income after allowed deductions. Preferential deductions are added back, and then the AMT exemption is subtracted to get the AMT taxable income (AMTI). AMTI is then taxed at the current rate schedule to get tentative minimum tax (TMT). If TMT is higher than the regular tax liability for the year, the regular tax and the amount by which the TMT exceeds the regular tax are paid (i.e. the taxpayer pays the full TMT).

BREAKING DOWN 'Alternative Minimum Tax - AMT'

AMT is designed to prevent taxpayers from escaping their fair share of tax liability through certain tax breaks, although the structure is rife with controversy as it is not indexed to inflation or tax cuts. This causes a condition known as "bracket creep", whereby upper-middle-income taxpayers are becoming subject to this tax. In 2006, the IRS National Taxpayer Advocate reported that the AMT often punishes taxpayers for having children or living in high-tax states.

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