How is an AMT Calculation Done?

An AMT calculation is carried out to determine eligibility for the alternative minimum tax. This is a special tax designed to make up for situations where a taxpayer can claim so many deductions that it reduces his tax liability by what is seen as an excessive amount. The basic principle is that anyone with an income over a certain amount should pay at least a certain amount of tax. The AMT calculation determines whether an additional payment is required to make sure this happens.

Two separate tax bills are calculated for the taxpayer to form the basis of an AMT calculation. The first is the standard tax liability, based on the usual measures. The second is the AMT, which uses a single fixed deduction and either one or two tax rates. The AMT calculation doesn't include the various deductions and exemptions that can normally be claimed, or apply the usual range of tax brackets. If the AMT calculation produces a higher figure than the standard calculation, the AMT figure takes precedence as the taxpayer's liability.

The first step of the AMT calculation is to apply the AMT deduction to the taxpayer's income. For the 2010 tax year, for example, the AMT deduction for individuals was fixed at $72,450 for a married couple filing jointly or a qualified widow; $47,450 for a single individual; and $36,225 for a married individual filing separately. This exemption is reduced if the taxpayer earns more than a certain amount, namely $150,000 for a couple; $112,500 for a single individual; and $75,000 for a married-filing-separately individual. For every dollar earned above this amount, the AMT deduction is reduced by 25%. Unlike the deduction itself, these limits do not increase by inflation each year, meaning the AMT affects more and more people over time.

Once the deduction has been calculated, the next step is to work out the AMT figure. This is 26% of the first $175,000 of the income after deduction, then 28% of any extra income. The $175,000 limit is reduced to $87,500 for a married-filing-separately individual.

The resulting AMT figure is compared with the standard tax liability for the individual, and the person must pay the higher figure. If the AMT figure is higher, the taxpayer still technically pays his standard tax bill. In such circumstances, though, the excess of the AMT figure over the standard figure is listed on the tax return as a separate tax liability. This means the total amount the person pays is equal to the figure produced by the AMT calculation.