Understanding the Alternative Minimum Tax

When some taxpayers hear “Alternative Minimum Tax” (AMT), they are filled with dread at the complexity of the rule. Some balk at the perceived unfairness of it, and still others won’t ever learn about the AMT until the IRS informs them that they owe more in taxes. Understanding the AMT is a good way to avoid all three reactions.

For many years, the IRS faced the problem that many high-earners were able to claim so many deductions that they owed little to no income tax. To solve this problem, the IRS enacted the AMT in 1969 to ensure that all income earners paid a minimum in taxes. The AMT is essentially a parallel or alternative tax code with its own rules—many deductions and credits aren’t allowed under the AMT, and it has its own tax brackets as well. Taxpayers are expected to calculate their tax burden two ways, once under the regular tax code and once under the AMT’s rules. Whichever outcome is higher is the tax they owe.

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