Income taxes are computed in two ways: using the standard tax system and the alternative minimum tax. The alternative minimum tax seeks to ensure taxpayers pay at least the minimal amount of income tax. Introduced in the late 1960s, the AMT excludes certain credits and reductions. A taxpayer will pay a higher tax bill if his AMT is higher than his regular tax bill.

An individual may pay this additional tax on the following premise:

  • Residing in a location with high local and state income taxes and/or high real estate taxes

  • Having a huge family

  • Owning private activity bonds

  • Claiming miscellaneous itemized deductions, including unreimbursed corporate expenses or investment expenses

  • Exercising and holding incentive stock options

The Internal Revenue Service has its own set of criteria and rules when it comes to determining a person’s AMT, such as income and filing status. The usual AMT tax rates fall between 26% and 28%. However, taxpayer may cut his income for AMT purposes. The following are the exemption amounts:

  • Single: $53,900 - $119,700

  • Married couples filing jointly or surviving spouses: $83,800 - $159,700

  • Married couples filing separately: $41,900 - $79,850

  • Estates and trusts: $23,900 - $79,850

A taxpayer needs to fill out Form 6251 or visit the IRS’ AMT Assistant for individuals to figure out whether his income is subject to the ATM. The primary key for lowering the AMT is to keep the adjusted gross income to a minimum. It is possible by doing the following:

  • Monitoring the timing of some payments such as local income taxes

  • Utilizing employer-sponsored cafeteria plans

  • Taking tax credits

  • Partaking in retirement plans such as 401(k) or SIMPLE IRA

  • Repositioning investment holdings

  • Making pre-tax contributions to flexible spending accounts

Lowering the alternative minimum tax is quite difficult but can be done like a pro. Understanding the AMT helps in understanding how it may affect your tax bill. While you can seek professional help for such a matter, it is advisable to study this topic yourself.

And oh, have we mentioned one can claim AMT credits for any given year, including the previous ones?