What is the "Alternative Minimum Tax"?

Q: Could you explain how the "Alternative Minimum Tax" works and when it's applied? --Scott, North Andover

The following answer was provided by Mark Misselbeck, CPA, Levine Katz Nannis & Solomon PC, Needham.

A: The Alternative Minimum Tax (AMT) is somewhat complicated. It takes your income from your Form 1040, after itemized deductions, but before your personal exemptions that you are used to claiming. If you do not itemize, you would use income after the standard deduction.

The AMT will then add back any standard deduction, or if you itemized, any deductions for taxes and miscellaneous items. It will subject any medical expenses you claimed on Sch. A to an additional reduction of 2.5% of Adjusted Gross Income (another add-back). Mortgage interest deductions that you claimed on Sch. A are not deductible if the money was NOT used to buy or improve your house (and are not deductible, at all, if your "home" that is being mortgaged is a boat). If you are claiming depreciation deductions for business or rental property, the rate of expensing the property is slower (and may be longer) than used in computing your regular tax. Other items may also have similar limits or adjustments.

In summary, the AMT takes away deductions (or limits them) if they are allowed under the regular tax.

The result is subject to an AMT standard deduction, which is lost, incrementally, as income climbs beyond a dollar threshold, depending on your filing status, both for the amount of the standard deduction and the threshold, until it vanishes for high income individuals. The resulting net amount is taxed at 26%, up to $ 175,000, and 28% above that amount, EXCEPT that dividends and capital gains still get the benefit of the reduced tax rate of 15%.

People likely to be "hit" with AMT are those with; several dependency exemptions; large capital gains or dividend amounts; large deductions for taxes or miscellaneous deductions on their Sch. A; large depreciation deductions; income from the exercise of Incentive Stock Options; or combinations between these items and other items involving different treatment under AMT than they receive under the regular tax system.