A different way of computing one’s tax liability; it MUST be used if the resulting tax is higher than the tax computed by the regular method. This alternate way of computing the tax was introduced over three decades ago to prevent higher income taxpayers from reducing or escaping income tax. The AMT is structured to ignore the use of certain tax breaks and deductions and to apply special rates – 26% and 28%. Inflation over the years has slowly increased the number of taxpayers who are subject to the AMT. Although the factors affecting the AMT are too numerous to delineate here, the ones most frequently encountered by the average taxpayer include:
- Taxes, including property taxes and state income tax, are not allowed as an AMT itemized deduction.
- Miscellaneous itemized deductions, including job-related and investment expenses, are not deductible for AMT purposes.
- The difference between the current market value and the exercise price of stock acquired through an Incentive Stock Option (ISOs) is added to income even though the stock has not been sold.
- Interest on home equity debt is not allowed as an AMT itemized deduction.