What Is Alternative Minimum Tax

Have you noticed that people with higher than average incomes pay less tax than those who are barely scraping by? Well, Congress has noticed it, too. The alternative minimum tax, or AMT, came about to level the playing field. This is an explanation of how it all breaks down for the taxpayer.

The alternative minimum tax is extra. Some people are required to pay this on top of their regular income. The guidelines for figuring this tax differ from those used for the standard IRS calculation. To determine if you have to pay this tax, compare your taxable income through the AMT calculations and the standard way.

The calculation to determine the alternative minimum tax is complex, but don’t worry about that. Most tax preparation software can calculate the amount of taxable income using the AMT guidelines, so it is easy to compare side by side with your ordinary taxable income. If the taxable income is lower with the standard calculation than with the AMT calculation, you don’t have to pay any extra taxes. If the situation is the other way around, you will likely owe the government some money.

I can see that some people are already confused. To make it easier, here’s an example. The amount of your taxable income is $40,000. When the taxable income is calculated using the AMT guidelines, the amount is $30,000. This means that according to the AMT guidelines, you will be paying taxes based on a higher amount than the IRS calculation. So there is no need to pay additional taxes.

On the other hand, let’s look at the reverse situation. According to the standard calculation, the amount of taxable income is $30,000. When the AMT guidelines are applied, the taxable income amount is $38,000. Since AMT assesses your income at a higher amount than the standard, you may not be paying enough taxes. So, you will have to pay taxes on the standard amount and the extra $8,000.

The system is designed to help the little guy, but it is not perfect. There are some kinks, and anyone can be subject to the alternative minimum tax. The alternative minimum tax calculations don’t allow for most of the deductions you are entitled to under the standard IRS calculation.

Unfortunately, this could be a problem for people with many itemized medical deductions and a high standard deduction. The government has instituted an alternative minimum tax exemption to fix this problem, but it is not a cure-all. Taxpayers can calculate their taxes with and without itemization and compare the figures to AMT calculations to avoid potential problems.

The alternative minimum tax is not a concern for most people who make a medium salary. It is targeted at those with substantial incomes who use tax shelters and other devices to pay less in taxes than the ordinary working man. Tax software can compute the AMT for you, so put your mind at ease.