Alternative Minimum Tax (AMT)
Definition
The Alternative Minimum Tax (AMT) is a supplemental income tax imposed by the federal government and is required in addition to baseline income tax for certain individuals, corporations, estates, and trusts that have exemptions or special circumstances allowing for lower standard income tax.
Detailed Explanation
The AMT is designed to ensure that certain taxpayers pay at least a minimum amount of tax if they benefit from certain deductions, credits, and exclusions that would otherwise allow them to pay little or no taxes. The AMT has its own set of tax rates and rules, which differ from regular income tax calculations. It operates by adding back into taxable income certain items that are tax-free under the regular tax system and disallowing many deductions, then applying AMT-specific exemptions and rates.
The calculation for AMT begins with adjusted gross income and requires the taxpayer to add back various preferences (such as state and local tax deductions and certain personal exemptions) to arrive at the Alternative Minimum Taxable Income (AMTI). After applying an exemption amount (which phases out at higher income levels), the AMTI is taxed at a flat rate of 26% or 28%, depending on the income bracket. If the AMT is higher than the regular tax liability, the taxpayer must pay the difference as AMT.
Example
Assume a taxpayer earns $500,000 and claims $100,000 in deductions that are allowed for regular tax purposes but disallowed for AMT purposes. After adding back these deductions, their income under the AMT rules would be $600,000. Assuming they are eligible for a $70,000 AMT exemption, their AMTI would be $530,000. The tax owed, calculated at the AMT rate, might be higher than their regular tax liability, thereby triggering the need to pay AMT.
Key Articles Related To The Alternative Minimum Tax (AMT)
Related Terms
Adjusted Gross Income (AGI): A measure of income calculated from your gross income and used to determine how much of your income is taxable.
Tax Deduction: A reduction of income that is able to be taxed, aimed at reducing your overall tax liability.
Tax Credit: An amount that taxpayers can subtract directly from taxes owed to the government.
Taxable Income: The amount of income used to calculate an individual’s or a company’s income tax due.
FAQs
Who is subject to the AMT?
Individuals, corporations, estates, and trusts that benefit from certain exclusions, deductions, or credits may be subject to the AMT, depending on their income and the extent of their tax preferences.
How can I avoid paying the AMT?
Avoiding AMT may involve reducing AMT-triggering deductions such as state and local taxes or miscellaneous itemized deductions, and exercising incentive stock options strategically.
Does the AMT apply every year?
Whether you owe AMT depends on your financial transactions and tax situation each year; changes in income or deductions can affect AMT liability.
Editor: Colin Graves