Alternative minimum tax (AMT) – Financial Terms

The AMT was designed to ensure that all taxpayers pay at least the minimum federal income tax that is appropriate for their income level, no matter how many deductions or credits they are entitled to claim. Taxpayers may trigger the AMT if they deduct high state and local taxes or mortgage interest expenses, exercise a large number of stock options, or have significant tax-exempt interest.

The AMT is actually an extra tax, calculated separately and added to the amount the taxpayer owes in regular income tax. In calculating the AMT, some items that are ususally tax exempt become taxable and special tax rates apply. For example, under AMT rules, income on certain tax-free bonds is taxable. Because increasing numbers of ordinary taxpayers are facing the AMT, there is some pressure on Congress to modify the rules.