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Congress imposes the alternative minimum tax (AMT) on taxpayers to prevent them from combining several tax exclusions, deductions and credits to pay very little or no federal income tax even though they have significant income. When it was first enacted in 1969, the AMT affected only a few, very high-income taxpayers. Since it was first imposed, changes to the regular tax rules cause many more taxpayers to pay the AMT. This fact sheet gives a basic explanation of the AMT, some examples of situations that cause taxpayers to pay it, and some planning techniques to minimize the impact of the AMT.
The terminology of the AMT tax can be confusing, because the tax that Congress calls the AMT is technically an add-on tax rather than an alternative to the regular income tax—the AMT is added on to the regular tax liability. The IRS follows the Congressional labeling and calls the amount of tax added on to the regular tax the “alternative minimum tax.” Therefore, taxpayers report their regular income tax on their income tax return and then add on the AMT to find their total income tax liability.
While the AMT is technically an add-on tax, it has the effect of an alternative tax because taxpayers calculate their AMT by subtracting regular tax liability from a “tentative minimum tax.” If the tentative minimum tax is less than the regular tax, there is no AMT. If the tentative minimum tax is greater than the regular tax, the AMT is the difference between the tentative minimum tax and the regular tax. Because the AMT is added to the regular tax, the effect of these rules is that taxpayers pay the higher of the regular tax or the tentative minimum tax. Therefore, the tentative minimum tax is in effect an alternative tax that taxpayers must pay if it exceeds their regular tax obligation.
This fact sheet focuses on the AMT imposed on individual taxpayers. Because only the owners of partnerships, S corporations, and limited liability companies (LLCs) that are taxed as disregarded entities, partnerships, or S corporations are taxed on the income of those entities (the entities do not pay tax on the income), the individual AMT is the only AMT imposed on the income of those entities. The AMT imposed on C corporations is discussed briefly at the end of the fact sheet.
Rural Tax Education
alternative, minimum, tax
Education | Higher Education | University Extension
Harris, Philip E., "Alternative Minimum Tax" (2011). Rural Tax Education. 33.