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What is the Alternative Minimum Tax?

High-income taxpayers often use tax breaks and loopholes in the tax code to significantly reduce their tax liability. The alternative minimum tax (AMT) is applied  to high-income taxpayers to ensure that they at least pay the minimum amount of tax. It does not as allow many deductions that other taxpayers use to reduce taxes.

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The AMT was introduced after it was found that 155 high-income taxpayers were legally reducing their tax bill, sometimes to zero. The AMT was not adjusted for inflation, which in time led to more and more middle-income taxpayers having to pay as well. To solve this problem, a permanent patch was passed by Congress in 2013.

Calculating the AMT

The AMT is a parallel income tax system. If you are a high-income taxpayer, you need to calculate your tax liability twice – once using the regular tax system and once using the AMT, to determine if you are required to pay the AMT. To calculate your AMT, you can use tax software or complete Form 6251, Alternative  Minimum Tax – Individuals. For line-by-line instructions on how to calculate your AMT, review Instructions for Form 6251’. To complete Form 6251, you may use the IRS AMT Assistant. This tool does not help to estimate out your AMT; it only provides assistance in completing Form 6251.

Tax Rates for AMT

For 2015, the AMT rate was 26%, applied to the first $185,400 ($92,700 for married filing separately) of taxable excess. The exemption amount on Form 6251 was $53,600 for single filers, $41,700 for married filing separately, and $83,400 for married filing jointly and for qualifying widow(er)s for 2015.

For 2016, the exemption amount is $53,900 for single filers and head of household, $41,900 for married filing separately, and $83,800 for married filing jointly.

Tentative Minimum Tax

To calculate the AMT, you first need to calculate your tentative minimum tax. Generally, the tentative minimum tax is calculated by:

  1. Calculating your taxable income by using all qualifying exclusions and deductions, and taking into account differences that appear when certain items are taken into account in computing regular taxable income and alternative minimum taxable income (AMTI),
  2. Subtracting the AMT exemption amount,
  3. Multiplying the amount computed in Step 2 by the current AMT tax rates, and
  4. Subtracting the AMT foreign tax credit.

Special Minimum Tax Credit

If you paid the AMT in one or more previous years, but do not owe it this year, you may qualify for a special minimum tax credit against your regular taxes. To claim this credit, File Form 8801, Credit for Prior Year Minimum Tax – Individuals, Estates, and Trusts.