How does AMT work

The Alternative Minimum Tax (AMT) operates as a parallel tax system with its own rules for calculating tax liability. Here's how it works:

1. Starting Point: The calculation begins with your taxable income (or AGI minus deductions if taxable income is zero) [1].

2. Adjustments and Preferences: The income is modified by:

• AMT adjustments (modifications to regular taxable income)
• Tax preferences (items receiving preferential tax treatment)
• Exclusion items (deductions not allowed for AMT)
• Deferral items (timing differences in income/deductions) [1]

3. Tax Calculation: After applying the AMT exemption, tax rates of 26% and 28% are applied to the resulting Alternative Minimum Taxable Income (AMTI) [2].

4. Final Step: If the AMT calculation results in a higher tax than regular income tax, you pay the difference as additional tax on Form 1040 [1].

Common AMT triggers include:

• High gross income relative to taxable income
• Exercise of incentive stock options
• Long-term capital gains
• Tax-exempt interest from private activity bonds [1]