Congress created the Alternative Minimum Tax (AMT) in 1969 to target higher-income taxpayers who were claiming so many deductions that they owed little or no income tax. AMT attempts to ensure that anyone who benefits from certain tax advantages pays at least a minimum amount of tax. AMT provides an alternative set of rules for calculating your income tax. In general, these rules should determine the minimum amount of tax that someone with your income should be required to pay. If your regular tax falls below this minimum, you'll have to make up the difference by paying AMT.
The regular tax system has progressive rates, meaning taxpayers with higher earnings pay more. AMT, on the other hand, is imposed at a nearly flat rate on an adjusted amount of taxable income above a certain threshold (also known as the exemption amount). If your regular tax is higher than what is calculated under the AMT system, you will not owe AMT.
Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT. Congress has not adjusted the exclusions for 2012 as of yet.
If you are subject to AMT, you will not receive any tax benefit when it comes to these items:
- Personal exemptions
- Standard deduction (if you don't itemize, this is added back)
- State income tax paid (if you itemize)
- Miscellaneous itemized deductions subject to the 2% AGI
- Charitable contributions
- Property taxes
- Mortgage interest on acquisition costs, home improvements and construction of a home
- Medical expenses that exceed 10% of your adjusted gross income
- Casualty losses