Alternative Minimum Tax (AMT) Definition
The tax law gives preferential treatment to some kinds of income and allows special deductions and credits for some kinds of expenses. Taxpayers who benefit from these provisions of the law may have to pay an additional tax called the alternative minimum tax. It is a separate tax computation that, in effect, eliminates many deductions and credits and creates a tax liability for an individual who would otherwise pay little or no tax. It prohibits individuals from claiming certain deductions or "preferences" when determining how much income is taxable. The more common adjustments and tax preference items include: personal exemptions, standard or certain itemized deductions, state and local tax refunds, accelerated depreciation of certain property, the difference between gain and loss on the sale of property, incentive stock options, depletion allowances, intangible drilling costs and certain tax-exempt interest. Taxpayers most at risk of AMT are taxpayers who typically claim multiple exemptions and deductions.