4.12  Alternative Minimum Tax

The alternative minimum tax, or AMT, is an alternative way of calculating income taxes. It was created as a backstop to make sure wealthy taxpayers could not avoid paying any income tax at all. The AMT is often called a “parallel” tax system, since it is not truly an alternative, optional way of calculating income taxes. Instead, taxpayers are required to calculate their alternative minimum taxable income (AMTI) and pay the tax on this amount if it is greater than what they owe under the regular income tax calculation. However, most Americans do not have to worry about paying the AMT, since it primarily hits higher income taxpayers. For the very highest earners, however, the AMT is less of an issue, since the top marginal federal income tax rate is higher than the maximum AMT rate. This means the ultra-rich usually pay a higher tax bill with the regular tax calculation than via the AMT method. (Formerly, the AMT also applied to corporations. This is no longer the case.)

With regards to the Series 7, know that certain tax deductions, credits, and exclusions do not receive favorable tax treatment under the AMT. Instead, these “tax preference items” must be added back to taxable income.

Here are some common differences between the AMT and regular in