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What is the alternative minimum tax?

The alternative minimum tax (AMT) is a separate tax computation that affects only certain taxpayers. The purpose of the AMT is to ensure that taxpayers with substantial income will not escape taxation entirely by employing certain exclusions, deductions, and credits. The tax law affords preferential treatment to certain types of income and allows special deductions and credits for some kinds of expenses. Taxpayers who benefit from these tax advantages have to pay at least a minimum amount of tax through an additional tax--the AMT.

You may have to pay the AMT if your taxable income for regular tax purposes, plus certain adjustments, is more than a specified exemption amount. More specifically, tax benefit items, known as adjustments and preferences, are added to your income to arrive at alternative minimum taxable income (AMTI). A special exemption amount is then subtracted from AMTI, and the result is multiplied by the applicable AMT rate. If the AMT calculation results in a higher tax liability than the regular income tax, the difference is reported as an additional tax on Form 1040. While the taxes are reported separately on your return, in effect, you would be liable for the AMT or the regular tax, whichever is higher.