| The alternative minimum tax (AMT) is one of the least | | | | The AMT, however, does not allow the standard |
| understood and most controversial parts of the federal | | | | deduction, personal exemptions, or certain itemized |
| income tax system of the United States. It is an extra | | | | deductions. Also, some income which is not subject to |
| tax some people have to pay on top of the regular | | | | the regular tax is added for AMT purposes. Your tax |
| income tax and it is used to recapture their tax liability | | | | under AMT rules may therefore be higher than what |
| and some deductions. | | | | you would owe under regular taxation rules. The AMT |
| Any taxpayer whose income exceeds a specified | | | | determines the minimum amount of tax someone with |
| level, based on his or her filing status, is required to | | | | a specific income should pay. If this person is paying |
| compute tax owed under both the regular income tax | | | | that much already with regular income tax, he or she |
| and AMT systems, and is liable for whichever amount | | | | will not be subject to paying AMT. If, however, that |
| is higher. It is therefore an alternative - albeit mandatory | | | | taxpayer's regular tax falls below the minimum, he or |
| alternative - method for calculating one's taxes. | | | | she has to make up the difference by paying the |
| Initially, AMT was introduced to prevent people with | | | | alternative minimum tax. |
| very high incomes from using special tax benefits to | | | | Determining How Much AMT to Pay |
| pay little or no tax and to make sure that these | | | | After calculating your taxes using both methods, you |
| taxpayers paid at least a minimum amount of tax. | | | | will need to compare the amount you need to pay |
| However, because AMT is not automatically updated | | | | according to regular income tax and the amount |
| for inflation, more middle-class taxpayers are becoming | | | | according to the AMT. If the regular tax amount is |
| subject to it. Due to this fact, a provision was included | | | | higher, then you are not liable to pay any AMT. |
| in the latest stimulus package passed by Congress to | | | | However if the regular tax is lower, then the difference |
| at least temporarily raise the income threshold for | | | | between the two amounts will be the AMT you will |
| AMT liability. | | | | have to pay. |
| The Difference between Alternative Minimum Tax and | | | | For example, if your regular income tax is calculated at |
| Regular Tax | | | | $1,025 and your AMT amounts to $1,500, you will be |
| The AMT has a completely different set of | | | | liable to pay a difference of $475. If however, your |
| calculations than the regular tax. When calculating | | | | regular income tax is $1,500 and your alternative |
| regular tax, you add up your total income, subtract | | | | minimum tax is $1,025, you will not be liable to pay |
| various deductions and personal exemptions, and then | | | | AMT. |
| calculate the tax. With the regular tax, you can also | | | | On a more positive note, an AMT credit can also |
| claim various credits to reduce your tax even further. | | | | reduce your taxes in years after the year you paid |
| AMT rates start at 26% and move to 28% at higher | | | | the alternative minimum tax. This is applicable if you |
| income levels while regular tax rates start at 10% and | | | | paid AMT because of certain "timing items" such as |
| then move through a series of steps to a high of 35%. | | | | exercising incentive stock options. |