what is Alternative Minimum Tax and how it is calculatedSolu

what is Alternative Minimum Tax and how it is calculated.

Solution

The alternative minimum tax (AMT) is an additional tax that is calculated separately from a taxpayer\'s regular tax and paid in addition to the regular tax. The AMT system is based on the regular income tax system, but AMT is calculated independently from regular tax. Under the AMT system, certain regular tax deductions are disallowed or allowed over a longer period of time. In addition certain income items that are not included in regular taxable income are included in alternative minimum taxable income (AMTI) and some income items are included in AMTI in an earlier period than in regular taxable income. The tax rates under the AMT are also different. Under the AMT, an individual taxpayer is subject to rates of:

Calculation of AMT:

Under the AMT system, a taxpayer must determine his or her alternative minimum taxable income (AMTI) using the separate AMT rules. Because the calculation of AMTI is based on the calculation of regular tax income, the calculation (which is done on Form 6251) begins with the taxpayer\'s adjusted gross income (if the taxpayer claims a standard deduction) or the taxpayer\'s adjusted gross income less itemized deductions if the taxpayer itemizes. The taxpayer adds or subtracts any AMT adjustment or AMT preference items to determine AMTI.

The taxpayer then applies the AMT rates to his or her AMTI to determine his or her tentative minimum tax. The tentative minimum tax is reduced by any AMT foreign tax credit available to the taxpayer. If the taxpayer’s tentative minimum tax (after applying the AMT foreign tax credit) exceeds his or her regular tax, the excess of the tentative minimum tax over the regular tax is the taxpayer’s AMT.

The basic formula for calculating AMT is as follows:

This formula is for use only in estimating the amount of a taxpayer’s AMT liability. In order to determine the actual liability, Form 6251 must be completed.

To Start with: Regular Taxable income

Add or subtract AMT Adjustments

Add AMT Preference items

Subtract AMT Exemption

Equals Alternative Minimum Taxable Income (AMTI)

Multiply AMTI by AMT rates

Equals Tentative Minimum Tax (before credits)

Subtract AMT Foreign Tax Credit

Equals Tentative Minimum Tax

Subtract Regular Tax

Equals Net Alternative Minimum Tax

If the net alternative minimum tax is a positive amount, the taxpayer must pay this amount in addition to his or her regular tax (less applicable non-refundable credits). If it is a negative amount, the taxpayer does not owe any AMT for the year.