A Guide to the Alternative Minimum Tax Amt

The alternative minimum tax (AMT) is a parallel tax system imposed on high income individuals, corporations, estates, and trusts. Its purpose is to ensure that high income earners cannot use tax shelters to reduce their income to non-taxable levels. Only those who owe AMT have to file the AMT forms.

The amount owing on AMT is equal to the amount calculated using the AMT criteria, less the amount of standard income tax owing. In other words, a taxpayer is required to pay either the standard income tax owing or the AMT owing, whichever is greater. Any required surtax is calculated solely on the AMT. AMT is imposed mostly on those who earn between $150,000 and $415,000.

The basis for calculating AMT is effectively a flat tax based on who or what is being taxed and the amount of taxable income, less a fixed exemption which is also based on who or what is being taxed. This is your adjusted taxable income for AMT purposes. A few forms of income, such as capital gains, are not fully taxable under the AMT.

For the 2010 tax year, the AMT exemption is $72,450 for married couples filing jointly or a qualified widower, $47,450 for singles, and $40,000 for a corporation. These exemptions are phased out at income levels which exceed 25% of AMT income. The AMT exemption is not indexed for inflation, although it has been increased several times in the past by enacted legislation. In spite of these Congressional adjustments, the AMT affects a larger percentage of middle income earners each year.

Most other exemptions and the standard deduction do not apply for this purpose. However, a few of the standard exemptions apply to the AMT as well, especially business credits. For example, 1/3 of allowable business investment losses may be claimed. Depreciation deductions are also allowed, although they are calculated according to a different schedule which slows down depreciation. Charitable deductions and home mortgage interest can sometimes be worth more on the AMT schedule than as an exemption on the standard tax form.

The amount paid in AMT may be claimed as a credit against standard tax in future returns, and can be carried forward for up to 7 years. This is called the minimum tax carryover. However, this credit cannot reduce the amount of standard tax owing below the AMT owing. Thus, the credit will not apply unless future income falls below the AMT exemption threshold.