The alternative minimum tax, also known as AMT, has been around for a long time but it is probably the least understood tax law that affects individuals on a regular basis. All individuals are actually subject to two income tax calculations.

Tax Calculation Number One 

In the first calculation you add up all your taxable income. From that figure you subtract the allowed adjustments to income such as the IRA deduction, student loan interest, etc. Then subtract the deduction for dependents, and subtract the standard deduction or itemized deductions. The result is your taxable income. Taxable income is matched to tax tables to determine your income tax liability.  This tax liability could be reduced by a few credits, leaving you with your final tax liability. 

Tax Calculation Number Two

However, each year more and more taxpayers are subject to the second tax calculation, the alternative minimum tax. This tax was intended to ensure that higher income taxpayers, who may have lots of deductions and exemptions, pay some "minimum" income tax. Individuals who are subject to this tax will file form 6251 - Alternative Minimum Tax - as part of their federal 1040 income tax return. The calculated tax is added to the regular income tax to determine the total tax due.

The calculation for the AMT starts with the same taxable income figure that is used to determine the regular tax. This figure is modified by eliminating some of the deductions allowed for regular taxable income. Deductions eliminated include some of the itemized deductions, dependent deductions, qualified dividends and capital gains income. Itemized deductions eliminated include: state and local tax payments, any allowed miscellaneous itemized deductions and part of any allowed medical expenses. In addition to the add back of some of the itemized deductions, the $3,200 deduction allowed for each personal exemption is also added to determine the alternative minimum taxable income. An exemption amount, based on your filing status, is then subtracted from AMT taxable income. The remaining figure is multiplied by either 25% or 28%, depending on your total income, to arrive at the alternative minimum tax.

You pay the higher of the two tax calculations.

This tax figure is then compared to your normal tax liability. If it is lower, you pay the normal tax amount as your current year income tax. If it is higher, the difference between the two figures becomes your alternative minimum tax which gets added to your normal tax liability to determine the total income tax due. In effect, the higher AMT becomes your tax liability, but it is made up of two parts, the AMT and the regular tax.

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