Minimum Tax Information

Introduction

Alternative minimum tax refers to a tax scheme which charges particular taxes on top of the regular income tax. The original intent behind this tax scheme was to prevent people with high income levels from utilizing special tax benefits in order to pay little or no taxes. However, alternative minimum tax has since expanded its reach to apply to individuals with average incomes and do not claim special tax benefits. The name AMT is derived from the way the tax scheme works. AMT uses an alternative set of rules to compute income tax. In theory, these rules should be able to stipulate the minimum amount of tax an individual with a particular income should be able to pay. If your current taxes are equivalent to or more than the computed AMT amount, then you exempted from paying AMT. However, if your current taxes are lower than the computed AMT taxes, you will have to pay the difference between the two figures.

History

So how can you tell whether you are exempt or eligible for alternate minimum tax? There are a number of factors that determine the liability of an individual for AMT. This can either be one big tax item or a combination of many small items. Some of the items that can contribute to AMT liability include interest payments on a second mortgage, deductions for state income tax, personal and dependency exemptions, etc. You can either opt to perform your AMT calculations using a computer software, or manually by hand. Using computer software is always easier and more efficient than the manual method.

Features

There are two essential elements that go into calculating alternative minimum tax. First, you will need to understand how your AMT liability is computed for a year. Secondly, you will need to understand how your AMT tax credits can reduce your annual taxes, once you pay your AMT tax obligations. To understand how much you owe under AMT rules, you should take into consideration the factors named below:

• The various tax benefits which are available under the regular tax scheme which can either be reduced or eliminated.

• People with a low or modest income can request for a special AMT deduction. However, this deduction will phase out once your income hits higher levels.

• AMT tax rates start at 26 percent and move upwards to 28 percent at higher income levels. In comparison, the regular tax rates start at 10 percent and then move upwards trough a series of steps, up to 35 percent.

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