Current (2017) Alternative Minimum Tax Explained

The Alternative Minimum Tax, or AMT, is a parallel tax system. Every taxpayer is responsible for paying the higher of the regular tax or the minimum tax.  If the minimum tax is higher, the difference between the two tax rates is added to your Form 1040 as an additional alternative minimum tax.

The alternative minimum tax began as a way to ensure that taxpayers pay at least a minimum amount of tax. The AMT has a completely different set of calculations than the regular tax. For the regular tax, you add up your total income, subtract out various deductions and personal exemptions, then calculate the tax. Against the regular tax you can claim various credits to reduce your tax even further. The AMT, however, does not allow the standard deduction, personal exemptions, or certain itemized deductions. Also some income which is not subject to the regular tax is added for AMT purposes. Your tax under AMT rules may be higher than your tax under regular tax rules.

 

The following items may trigger an AMT liability:

  • Itemized deductions for state and local taxes, medical expenses, and miscellaneous expenses
  • Mortgage interest on home equity debt
  • Accelerated depreciation
  • Exercising (but not selling) incentive stock options
  • Tax-exempt interest from private activity bonds
  • Passive income or losses
  • Net operating loss deduction
  • Foreign tax credits
  • Investment expenses

This list is not comprehensive, but reflects the typical adjustments I see that can trigger an AMT liability. Typically, the alternative minimum tax eliminates most or exactly all of the regular tax savings from the above-mentioned deductions.