Enacted back in 1969, the alternative minimum tax (AMT) is a separate income tax calculation that was designed to make sure that high-income taxpayers pay a minimum amount of taxes, even if they have sufficient deductions and credits to reduce their federal income tax liability to zero.
To calculate the AMT, start with regular taxable income, which includes all your familiar deductions and exemptions. Then make adjustments and add back certain “preferences” to arrive at your AMT income. Preferences include personal exemptions, state and local taxes, certain interest on home-equity loans, and miscellaneous itemized deductions.
After adding back the preferences, you’re entitled to an exemption amount, though the exemption phases out at higher-income levels.
You then calculate your AMT by applying tax rates of either 26 percent or 28% depending on your AMT taxable income. The income thresholds for these rates change each year. Finally, you compare your AMT to your regular tax and pay whichever is greater.