Alternative Minimum Tax

The alternative minimum tax, or AMT, is a parallel tax system that forces you to calculate how much you owe in federal income taxes using a completely different set of rules. The AMT tends to hit folks who live in states with high state income taxes and include those taxes among their itemized deductions. It often also snags those who realize large capital gains or who have three or more children. If the amount owed under the AMT is greater than under the usual income tax calculation, you have to pay the difference.

For individuals, the AMT consists of just two tax rates, 26% and 28%. When calculating how much you owe under the AMT, you can’t claim personal exemptions or the standard deduction. You can claim itemized deductions, though what counts is severely curtailed. For instance, no deduction is allowed for state, local or property taxes. You can still deduct charitable gifts and most mortgage interest. Deductible retirement plan contributions, which aren’t reported as an itemized deduction, also reduce your income for AMT purposes.

While you can’t claim personal exemptions when calculating how much you owe under the AMT, you do get the benefit of the much larger AMT exemption. That exemption is adjusted each year for inflation. For unmarried individuals, the exemption is worth $54,300 in 2017. For married couples filing jointly, the exemption is $84,500 in 2017. The AMT exemption phases out at higher income levels, so the effective marginal AMT tax rate is often higher than the notional 26% and 28% rates.

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