J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Alternative Minimum Tax Basics

Alternative minimum tax is designed to ensure that all taxpayers pay at least some tax. Years ago, with tax shelters and other loopholes, wealthy individuals and corporations often paid little or no tax. In an effort to make all taxpayers share the tax burden, an AMT was imposed.

The AMT is a separate tax system, with its own deductions and tax rates. A taxpayer computes the regular income tax as well as a tentative AMT. The extent to which the tentative AMT exceeds regular tax liability is reported as AMT.

Alternative minimum tax liability for individuals can be reduced by certain personal tax credits, including a limited foreign tax credit (corporations can reduce their AMT liability only by a limited foreign tax credit). There are 2 different AMT structures: 1 for C corporations and another for individuals.

C corporations pay AMT at the rate of 20%. This rate is applied to alternative minimum taxable income (AMTI) reduced by an exemption amount of $40,000 (reduced by 25% of the amount by which AMTI exceeds $150,000). Alternative minimum taxable income includes an adjusted current earnings (ACE) adjustment. This adjustment is designed to measure income tax on as broad a basis as it is for financial reporting purposes.

Individuals have a two-tier AMT rate structure of 26% on the first $175,000 of income subject to AMT, plus 28% on any excess amount. The amount subject to these tax rates is reduced by an exemption amount. This exemption amount is ...