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Basics of Alternative Minimum Tax Explained

  Sanjiv Gupta CPA  Published 
Basics of Alternative Minimum Tax Explained

What is Alternative Minimum Tax?

The underlying purpose of alternative minimum tax is to provide protection to individuals who have higher earnings in situations where they might pay little or no amount as tax (because of the fact that a considerable part of their earnings is reduced by some deductions such as tax shelters, the portion of the profits that have not been taxed, etc.) The AMT can be regarded to be an alternative option for regular income tax, but the thing is that there is no reason to pay both the taxes at a time, instead one can pay the higher of these two. This system of tax was implemented in 1986. It is advised that if anyone comes across such a situation where the application of Alternative Minimum Tax is required then he must obtain legal advice and guidance from professional tax experts to manage the potential tax liability that might occur.

 How is AMT calculated?

Every year the tax calculations of individuals are done on the basis of the regular method that takes into account preferential deductions and credit accounts. This number is then compared to another calculation where the tax calculation is subjected to a lower rate. So if the second calculation amounts to higher payment of taxes then the individual has filed for it. The result that is brought forward by deriving the difference between the regular tax owing and the next calculation is called AMT.

If the taxable amount of an individual comes under the purview of AMT, this condition can well be considered as a prepayment of future tax. The amount that has to be paid at the present situation against regular tax can be recovered over the next seven years. If the AMT is to be revived then it is absolutely necessary to have a running income in the said period (7 years) which will be taxable, otherwise, the total amount paid as AMT will be lost.

One should be aware of such conditions that require the application of AMT beforehand otherwise it can create problems during the final preparation of tax returns. To avoid future problems that may arise due to the application of alternative taxation system one should take the help of tax advisors who can provide appropriate planning required for recovering or minimizing the effects of the AMT. However, those who are enjoying tax deductions or discounts must be fully prepared for the imposition of this tax.