Definition
The Alternative Minimum Tax is a parallel tax system designed to ensure that taxpayers with many deductions still pay a minimum amount.
How It Works
Taxpayers calculate their tax under the regular system and again under AMT rules, which disallow certain deductions and apply different rates, then pay the higher of the two. An exemption amount shields lower income from AMT and phases out at higher income.
Example
A taxpayer with large state tax deductions and incentive stock option exercises may find AMT applies and owe more than the regular calculation.
Who It Applies To
Often high earners with significant deductions, incentive stock options, or certain types of income.
Watch-Outs
Exercising incentive stock options is a frequent AMT trigger, so timing matters.
