Alternative Minimum Tax - AMT

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.

BREAKING DOWN 'Alternative Minimum Tax - AMT'

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 2015, the AMT exemption for individual taxpayers is $53,000. 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 $47,000. In contrast, if his AMTI is only $40,000, that is less than the exemption, and he does not have to pay AMT.

Taxpayers with AMTI over a certain threshold do not qualify for the AMT exemption. As of 2015, for example, individual taxpayers with AMTI over $119,200 do not qualify for the AMT exemption, meaning TMT is calculated taking the entirety of their AMTI into account.

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 ATM

To determine if they owe ATM, 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.