What is alternative minimum tax (AMT)?
Alternative minimum tax is a separately calculated tax determined by using the AMT calculation on Form 6251 and is higher than the tax determined by using regular tax calculation. AMT was established in 1969 to keep a few wealthy Americans from taking advantage of loopholes in the tax law to avoid paying their fair share of taxes. However, the AMT calculation has not been updated to account for inflation. So, since 1969, more and more taxpayers are being caught "in AMT."
For most taxpayers, the AMT calculation takes into account regular taxable income, but it disallows certain deductions. Most notably, AMT disallows state income taxes, property taxes, and miscellaneous itemized deductions. There are too many other adjustments to list here, but most taxpayers find themselves in AMT because of the three items mentioned above.
AMT taxable income is determined by:
- Disallowing certain deductions
- Adding in certain types of income, like the value of incentive stock options¹
- Calculating a fixed deduction based on your AMT taxable income
The calculation can be fairly simple or very complex, depending on your situation. Depending on your AMT taxable income, AMT tax is a flat 26% or 28%, minus the exclusion. After you calculate your AMT tax, compare it with your regular tax. You will, of course, have to pay the higher of the two tax figures.
¹ The exercise of Incentive Stock Options requires careful planning and consideration as it impacts the AMT tax calculation. Please consult your tax advisor if you have Incentive Stock Options.
More commonly asked questions
- Will I be in alternative minimum tax (AMT)?
- What should I do if I am in alternative minimum tax (AMT)?