Question

Describe the purpose of the AMT-Alternative Minimum Tax. Give a general description as to how it is calculated. Provide a scenario for the calculation.

Answer 1

1. Alternative minimum tax, as the name itself says, is the minimum tax every person is liable to pay, by lifting the existing tax provisions.
2. The tax payer will be required to pay the tax as per normal provisions or as per AMT whichever is greater.
3. It may happen that wealthy people try to avoid tax by claiming the benefits under the normal tax provisions, that they exploit the benefits by the expenses incurred, as we know high earners usually expend a lot.
4. In order to eliminate this,AMT came into force to curb such practices.
5. Calculation,
   1. The first will be to calculate the tax as per normal provisions in Form 1040.
   2. Then the AMTI(Alternative minimum taxable income) will be calculated by making certain adjustments as to adding and delete certain items from normal provision calculation and then apply tax items called AMT preferences.
   3. And then AMT exemption income shall be computed which will different from normal deductions and personal exemptions, these rules changes from time to time, so it shall be computed by taking into consideration the current system prevailing.
   4. Then the net AMTI shall be computed and multiplied with 26% or 28% as applicable to determine the AMT.