Q:

How does the IRS alternative minimum tax work?

A:

Quick Answer

Alternative minimum tax is compared to the regular tax due and serves as a separate set of rules to ensure that high-income households pay a minimum income tax, notes the Houston Chronicle. Taxpayers pay the greater of the regular tax and alternative minimum tax.

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Full Answer

The availability of several deduction and credit items makes it possible for high-income taxpayers to avoid tax altogether, states the Houston Chronicle. As a result, alternative minimum tax disallows several of these credits and deductions to ensure that a tax is actually assessed. Alternative minimum tax only applies to certain taxpayers that have income above a certain threshold. Taxpayers can complete the alternative minimum tax worksheet and find more detailed instructions on Form 6251.

The Houston Chronicle mentions that alternative minimum tax calculations are increasingly complex. The Internal Revenue Service offers a website with an automated assistant to help taxpayers understand these complexities. Some of the items that alternative minimum tax addresses include accelerated depreciation, stock options, investment interest expense, intangible costs and prior year credits.

The alternative minimum tax rules vary from year to year, and taxpayers can access prior year assistants if necessary. Taxpayers must have a draft of their regular Form 1040 available in order to complete the alternative minimum tax calculation. The alternative minimum tax is listed on a particular line in Form 1040 when filing a tax return.

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