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 or her alternative minimum taxable income (AMTI), and 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 the tentative minimum tax (TMT). If the 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 for 2017 and 2018

The AMT exemption amount is the amount of AMTI that is exempted from AMT. For 2017, the AMT exemption for individual taxpayers is $54,300. Beginning in 2018, the AMT exemption for individual filers is $70,300. For married joint filers, the figures are $84,500 in 2017 and $109,400 in 2018.

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 ($54,300 for 2017; $70,300 for 2018). If his AMTI is less than the exemption, he does not have to pay AMT.

It's important to note, though, 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 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 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.

RELATED TERMS
  1. Tax Preference Item

    Tax preference item is a type of income, normally tax-free, that ...
  2. Tax Base

    A tax base is the amount of assets or income that can be taxed.
  3. Personal Exemption

    A personal exemption was a below the line deduction for tax years ...
  4. Itemized Deduction

    Itemized deductions are deductions that allow taxpayers to take ...
  5. Foreign Tax Credit

    The foreign tax credit is a non-refundable tax credit for income ...
  6. Tax Shelter

    A tax shelter is a vehicle used by taxpayers to minimize or decrease ...
Related Articles
  1. Taxes

    Can Trump Kill the Alternative Minimum Tax (AMT)?

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

    Defunct: Refundable AMT Credit for Employee Stock Option Taxes

    These refundable AMT credits helped taxpayers save on taxes, AMT bills and more – but expired in 2012.
  3. Taxes

    Tax Planning Strategies for the Year Ahead

    The uncertainty surrounding President-Elect Trump may have a significant impact on tax planning.
  4. Taxes

    The Impact of New Tax Code on Financial Planning

    Here's how the Tax Cuts and Jobs Act will impact financial planning.
  5. Taxes

    Are You Missing Out On These Tax Exemptions?

    To lower your tax bill, make sure that you're taking all the exemptions that apply to you.
  6. Taxes

    Making Sense of the 2017 Tax Changes

    Here is a brief overview of some of the changes introduced by the Tax Cuts and Jobs Act of 2017, and how they may affect your taxes.
  7. Taxes

    5 Groups That Don't Pay Taxes

    Now that you've paid your share, find out who didn't have to pay taxes this year.
  8. Taxes

    The Tax Cuts and Jobs Act (TCJA) and Your Taxes

    Learn how the Tax Cuts and Job Act (TCJA) tax reform bill affects your finances.
  9. Taxes

    10 Money-Saving Year-End Tax Tips

    Getting organized well before the deadline will curb your frustration and your tax liability.
  10. 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.
RELATED FAQS
  1. What's the difference between a tax rate and a tax bracket?

    These two terms are often incorrectly used interchangeably. Find out the difference between your tax rate and your tax bracket. ... Read Answer >>
  2. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
Trading Center