What is the alternative Minimum Tax (AMT)?

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The alternative minimum tax (AMT) is a tax calculation designed to ensure that everyone pays their fair share of federal income taxes.

There are all sorts of tax deductions and tax loopholes available to be taken advantage of for the purpose of lightening the burden of income taxes.

The AMT uses a different set of rules to calculate the minimum taxes that should be paid based on a person’s level of income.

Generally speaking, the AMT calculation limits the number of tax deductions an individual can use.

The alternative minimum tax will be triggered if the AMT calculation suggests that a taxpayer should be paying more in taxes than they would using the standard method of calculating income taxes. In a situation where the AMT calculation indicates a higher tax liability, the taxpayer is required to pay the AMT.

A Different Set of Rules

The AMT has a different set of rules for which deductions can reduce taxable income. For example, the AMT doesn’t reduce taxable income for the standard deduction or most itemized deductions.

The table below highlights a list of common tax deductions not allowed by the AMT, but this is not an exhaustive list.

Click or tap on the image above to enlarge

For people who frequently take advantage of tax deductions, the net effect of the AMT usually results in their owing more in taxes.

Generally speaking, the AMT will increase your tax liability if you’re married, have a large family, own a house, or live in an area with high state and local taxes on income or property.

This is because common tax breaks such as the deduction for dependents, the mortgage interest deduction, and the deduction for state and local taxes are not considered for the purposes of the AMT.

Calculating the Alternative Minimum Tax

Calculating the alternative minimum tax is complicated and necessitates using tax software to get it right, but understanding the basic mechanics of the AMT can be helpful.

The AMT calculation starts by adding back deductions taken by an individual to calculate their alternative minimum taxable income (AMTI).

The AMT exemption is then subtracted from the AMTI. The difference between the AMT exemption and the AMTI is taxed at the relevant tax rate.

If the tax liability calculated by the AMT method is higher than the tax liability calculated by the normal method, then the taxpayer owes the alternative minimum tax. If the AMT calculation is lower than the standard tax calculation, then the taxpayer can ignore the AMT amount.

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