Alternative minimum tax (AMT) was created in 1969 by the Tax Reform Act to make certain that high-income individuals, corporations, trusts, and estates pay at least some small amount of tax, in spite of any deductions, credits, or exemptions. It’s basically an alternative method used by the IRS for calculating your taxes, an extra tax that was an addition to regular income tax. To calculate your AMT you start with your AGI (adjusted gross income), then you give back the “tax preference items” and “adjustments” under the AMT rules to get your taxable income for AMTI (AMT taxable income). After that a tax rate is applied of either 26% or 28% to the income. It is a tax apparatus that is triggered when a big number of exemptions on state and local taxes paid, expenses (medical or itemized), deductions, or on ISO plans. To calculate AMT, you must use the Form 6251 along with the 1040, you use whichever is higher, the AMT or the regular tax owed.
The words “tax preference items” and “adjustments” include all of the following; accelerated depreciation, miscellaneous itemized deductions, the bargain aspect of ISO plans, percentage depletion, state and local income, sales and property taxes, a part of deductible medical expenses, certain tax-exempt income and credits, personal exemptions, standard deductions, tax shelters, interest on second mortgages and some long-term capital gains. The difference between the two terms is that a preference is an addition between the special AMT and regular tax treatment, and the adjustments entail a replacement of a special AMT treatment of an item for the regular tax treatment. This plan started out only to affect a small number of taxpayers, but over the years has grown significantly. Some think that the rise of inflation is the likely cause of this growth. If a taxpayer has paid the AMT, than they are subject to a tax credit to reduce their future tax liability.