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Alternative minimum tax (AMT)

An alternative method of calculating income tax liability. The amount of AMT is compared with the amount of your regular income tax, and you pay the higher of the two. The AMT system requires you to include in your alternative minimum taxable income (AMTI) a number of "tax preference items" and deductions under the regular income tax rules.

First you compute your tax liability as you normally would by completing your IRS Form 1040 tax return. Then you separately recompute your taxes under the AMT system by following its special rules. (See IRS Form 6251 and its line-by-line instructions.) You compare your AMT to the regular tax you owe and pay the higher amount (technically, AMT is the amount over your regular tax).

The AMT rates are 26% and, for high incomes, 28%. The AMT can be triggered in any of several ways. For example, taxpayers can be subject to the AMT if they exercise incentive stock options (ISOs) and hold the ISO stock through the calendar year of exercise. If you incur the AMT through an ISO exercise, you will have an AMT credit which you can use to reduce the taxes you will owe in future years.

Unlike the exercise spread of ISOs, nonqualified deferred compensation itself is not an AMT preference item. However, deferrals of income can serve to prevent you from triggering the AMT in a tax year; conversely, income you receive in a distribution can trigger the AMT.