What is the Alternative Minimum Tax, or AMT?
A. The Alternative Minimum Tax is a parallel tax system set up to ensure that all taxpayers pay some share of federal income tax. It is calculated by adding back certain tax preference items and deductions to arrive at the AMT taxable income. Unfortunately, more taxpayers have been affected by this provision the last few years. Talk continues about eliminating the provision but the cost may be too high.
The alternative minimum tax (or AMT) was created many years ago to insure that higher-income taxpayers with lots of deductions and credits pay at least a minimum amount of tax. But, because the AMT has never been indexed for inflation, a growing number of middle-income taxpayers now face this tax. The AMT is a separate tax calculation that disallows many of the deductions and credits used to calculate regular income tax. It also adds back certain income that is not normally taxed. The most common AMT adjustments are for personal and dependent exemptions and for certain itemized deductions, such as state and local taxes. Also, if you exercise incentive stock options, sell investments with large long-term capital gains, or take depreciation on business property, you may be hit with the AMT. You’re required to calculate your tax under both the regular and AMT method. You then pay whichever tax is higher.
