Alternative Minimum Tax Definition

By: Bill Waters
01/10/2012 05:27 PM ET

Alternative Minimum Tax Definition – A 2011 IRS tax system known as the Alternative Minimum Tax is another way for individuals with higher income to calculate their federal income taxes. For the most part, it’s very complicated.

The rules were created to ensure that higher income individuals, trusts, and estates will have to pay this year, regardless of deductions, IRS credits, or exemptions.

The Alternative Minimum Tax guidelines force certain tax-preference items back into your adjusted gross income.

People who earn more money pay more in taxes, which is why it was important for such people to make extensive use of tax shelters and deductions.

The alternative tax was introduced in 1969, and was originally intended to affect only 155 U.S. households, but by 2010 it is projected that up to 20% of households may be affected.

The system is often triggered when numerous personal exemptions are claimed on state and local taxes, when there are numerous miscellaneous itemized deductions or medical expenses, or when there are Incentive Stock Option (ISO) plans.

The Alternative Minimum Tax has become one of the most controversial tax systems in the IRS.
Here are the most common adjustments:

• addition of personal exemptions
• addition of the standard deduction, if claimed by the taxpayer
• addition of itemized deductions claimed for state and local taxes, certain types of interest, most miscellaneous deductions, and certain medical expenses
• subtraction of any refunded state and local taxes included in the gross income
• changes to the accelerated depreciation of certain property
• difference between gain and loss on the sale of property
• addition of certain income from incentive stock options
• change in certain passive activity loss deductions
• addition of certain depletion that is more than the adjusted basis of the property
• addition of part of the deduction for certain intangible drilling costs
• addition of tax-exempt interest on certain private activity bonds. Taxpayers may have to pay the Alternative Minimum Tax if their taxable income for regular tax purposes, combined with these adjustments and tax preference items, is more than $69,950 for married couples filing jointly, $46,200 for those filing as single or head of household, or $34,975 if married and filing a separate return. The AMT tax rate on income up to $175,000 ($87,500 for a married couple filing separately) is 26%, while it is 28% for income over $175,000.

As you can see, calculating the Alternative Minimum Tax can be extremely complex, and it is best left to a certified public accountant.