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Finance Dictionary and Glossary of Investment Terms
Alternative Minimum Tax
AMT. An IRS mechanism created to ensure that high-income individuals, corporations, trusts, and estates pay at least some minimum amount of tax, regardless of deductions, credits or exemptions. It operates by adding certain tax-preference items back into adjusted gross income. While it was once only important for a small number of high-income individuals who made extensive use of tax shelters and deductions, more and more people are being affected by it. The AMT is triggered when there are large numbers of personal exemptions on state and local taxes paid, large numbers of miscellaneous itemized deductions or medical expenses, or by Incentive Stock Option (ISO) plans.
A special minimum tax that is imposed if you took too many special deductions, such as interest, medical expenses, taxes, miscellaneous deductions and passive activity losses. These “excess” deductions are added back into your income and the result is taxed at a flat rate of either 26% or 28%. You would pay the higher of either your regular tax or this alternative minimum tax.