The alternative minimum tax (AMT) – often called a “stealth tax” – snares unsuspecting or uninformed taxpayers each year. With a better understanding of the rules, you may be able to avoid or reduce adverse tax consequences.

Overview: The AMT is a separate tax system that runs parallel to the regular income tax system. This complex calculation includes additions for “tax preference items” and reductions for personal exemptions and certain tax deductions. There are five basic steps to computing the AMT.

1. Determine your taxable income for regular income tax purposes.
2. Make the technical AMT adjustments required by law.
3. Subtract a special “exemption amount” based on tax filing status ($48,450 for single filers, $74,450 for joint filers, and $37,225 for marrieds filing separately). These exemption amounts are reduced for high-income taxpayers.
4. Apply the AMT rate to the result. The rate is 26% on the first $175,000 of AMT income and 28% for amounts above $175,000.
5. Compare your AMT liability to your regular tax liability. You pay whichever tax is greater.

Best approach: Estimate your AMT exposure before year-end. Depending on your situation, it may make sense to avoid tax preference items or postpone certain deductions. Caution: This is a complex area of the tax law, so contact our office if you need more information or planning guidance.