The alternative minimum tax (“AMT”) is a tax that was developed to ensure that certain high-income corporations and individuals pay a certain minimum amount of tax. Essentially it is designed to prevent these high-income earners from using certain tax deductions, exemptions and losses to escape from paying income tax entirely. It is calculated using a different method than the regular tax calculation performed on your normal tax return.
Generally, all taxpayers must calculate AMT with their tax return and all taxpayers are subject to the tax. The AMT will kick in if it exceeds your regular amount of tax due. Therefore, it represents a certain minimum threshold that you will be taxed at, no matter what your regular tax computation turns out to be. The way that the AMT works is that it is calculated while preparing your return, and then the amount of the AMT is compared with the regular amount of tax due shown on your tax return. To the extent that the AMT amount exceeds the amount of regular tax due shown on your return, you will owe that amount of AMT on your tax return in addition to your regular tax. It captures a minimum amount of tax from the taxpayer by ensuring that the taxpayer has to pay at least the amount that is calculated as their AMT.
The AMT is calculated basically by coming up with a different taxable income number, referred to as the alternative minimum taxable income (“AMTI”). The AMTI is determined by taking your basic taxable income that you determine when preparing your tax return and then adds back a series of tax preference items (“TPIs”), which are items that have been identified as items that can bring excessive tax savings for some corporations and individuals. Through the method of adding these items back, the AMT seeks to mitigate the tax savings of these items to avoid excessive deductions and exemptions causing a taxpayer to have little or no tax due.
Once AMTI is determined, exemptions are taken and then the AMT is calculated based on the AMTI amount less exemptions. The first $175,000 of income is taxed at 26 percent and any amount in excess of that is taxed at 28 percent. If there are any foreign tax credits available, they are applied against the tax to arrive at the ultimate tentative minimum tax. The amount that the tentative minimum tax exceeds the taxpayer’s calculated regular tax due is considered the AMT amount that will additionally be due with the taxpayer’s tax return.
The AMT is a confusing and sometimes complex set of rules that seeks to prevent certain taxpayers from avoiding tax through use of certain deductions and exemptions. Although it can be a real headache to calculate and deal with the AMT, knowing a little bit about the background and what the AMT is all about should help you in preparation of your taxes. It is something that is important to have a little familiarity with, in case you ever come across it when tax preparation time rolls around this year.