The alternative minimum tax (AMT) is a separate tax that is imposed in addition to your regular tax. It applies to taxpayers who have certain types of income that receive favorable treatment, or who qualify for certain deductions, under the tax law. These tax benefits can significantly reduce the regular tax of some taxpayers with higher economic incomes. The AMT sets a limit on the amount these benefits can be used to reduce total tax. AMT is designed to prevent taxpayers from escaping their fair share of tax liability through tax breaks.

The AMT recalculates income tax after adding certain tax preference items back into adjusted gross income. AMT uses a separate set of rules to calculate taxable income after allowed deductions. Preferential deductions are added back into the taxpayer's income to calculate his or her alternative minimum taxable income (AMTI), and then the AMT exemption is subtracted to determine the final taxable figure.

It gets triggered when taxpayers make more than the exemption and use many common itemized deductions. For tax year 2020, the AMT exemption for individual filers is $72,900. For married joint filers, the figure is $113,400. For tax year 2021, the figures are $73,600 for individuals and $114,600 for couples. The exemption phaseout is $518,400 in AMTI for single filers and $1,036,800 for married taxpayers filing jointly.

The AMT is the excess of the tentative minimum tax over the regular tax. Thus, the AMT is owed only if the tentative minimum tax for the year is greater than the regular tax for that year. The tentative minimum tax is figured separately from the regular tax. In general, compute the tentative minimum tax by:

1. Computing taxable income eliminating or reducing certain exclusions and deductions, and taking into account differences with respect to when certain items are used to compute regular taxable income and alternative minimum taxable income (AMTI)
2. Subtracting the AMT exemption amount
3. Multiplying the amount computed in (2) by the appropriate AMT tax rates, and
4. Subtracting the AMT foreign tax credit.