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In a twisted plot to take back the tax breaks it provides, Congress created the alternative minimum tax (AMT).
Because some taxpayers - particularly wealthy taxpayers - had been so successful in their efforts to legally minimize their tax bills, Congress came up with another way to tax them: the alternative minimum tax (AMT). The AMT provides a formula for computing tax that ignores certain preferential tax treatments and deductions that taxpayers would otherwise be entitled to claim.
Initially, the AMT was intended to prevent higher-income taxpayers from substantially reducing or eliminating their tax liabilities through incentives offered by the tax code. In practice, however, the AMT affects even middle-income taxpayers because the AMT exemption amounts have traditionally not kept up with inflation. For example, the exemption rates set in 1992 were not increased until 2001.
As a result, many taxpayers are required to compute their income tax liability twice: once under the regular method and once again under the AMT method. An individual will be subject to the AMT if his or her AMT liability is more than the regular tax liability for the year.
What types of things can trigger the AMT? The most common items that can cause you to become subject to the AMT are listed below. These items must be added back to your taxable income in order to compute your AMT:
If you have large amounts of any items on this list, and your adjusted gross income exceeds the exemption amounts discussed below, you (or your accountant) should compute your AMT liability on IRS Form 6251, Alternative Minimum Tax Individuals, to determine whether you must actually pay any AMT.
If AMT potentially applies to you, you need to know about the following: