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What is Alternative Minimum Tax

Alternative Minimum Tax or AMT was created to prevent high income holders from evading tax by using various mechanisms. The procedure works as follows:
1. Calculate your tax liability
2. Calculate your AMT
3. Pay the higher amount

A form is available for computing your AMT liability. After you figure out your taxable income you add back the benefits to give you the Alternative Minimum Taxable Income (AMTI). This income then has exemptions after which AMT is calculated at a specified rate. AMT then gets applied if it is higher than your regular income tax. The excess of AMT over the regular tax is your liability called additional tax.

The following are the adjustments in AMT:
1. Disregard standard deductions and exemptions
2. A lesser amount is deductible on mortgage interest in AMT than in regular tax.
3. Taxes that are state, local or foreign are added back to the income.
4. Medical expenses are added back to income
5. Adjustment is made for investment interest income that compares the regular tax and the AMT.
6. Adjustments are made for income made from stocks
There are many such adjustments that are required.

Tax preference items increase the AMT you have to pay. These include:
1. A percentage on the gain of stocks.
2. The difference between the accelerated depreciation and straight line depreciation with regards to property.
3. Tax credits

You can avoid AMT by adjusting your income from year to year to keep your income and expense items in range.

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