The alternative minimum tax (AMT) is a separate tax system that runs parallel with the regular tax system and generally imposes a minimum tax on taxpayers who have substantially lowered their regular tax liability by taking advantage of items including certain itemized deductions, exemptions, and credits. Essentially, the AMT system recalculates an individual's tax liability using a separate formula under which many of the otherwise available reductions to taxable income are disallowed. The alternative tax is then compared to the taxpayer's regular tax, and the higher amount must be reported as the tax due. Certain amounts of income are exempt from the AMT, but the exemption amounts are not indexed for inflation. Consequently, more taxpayers are impacted as income levels rise due to inflation. In recent years, Congress has provided some relief by passing temporary increases in exemption amounts.
Although the alternative minimum tax (AMT) system was originally enacted to ensure that all taxpayers, particularly high-income taxpayers, paid at least a minimum amount of federal income tax, government projections indicate that a high percentage of middle income taxpayers will become subject to the AMT in the future.
The computations involved in determining whether a taxpayer is required to pay AMT are extremely complex. Given the complexity of the rules and the increasing numbers of individual taxpayers who are finding themselves subject to the AMT system, individuals may benefit from tax planning to minimize or eliminate AMT liability. In planning to minimize overall tax liability, however, it is important to consider both regular tax liability and potential AMT liability, because minimizing regular taxes can generate AMT liability, and a focus solely upon avoiding or reducing AMT liability can result in an increase in regular tax liability. Generally the best case scenario under the current regulations is for your regular tax calculation to be as close to the AMT tax calculation.
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