Alternative minimum tax definition

The alternative minimum tax (AMT) became part of the Federal tax law in 1970 as a shadow income tax calculation with its own rules, separate from the regular income tax calculation. It was designed to ensure that all filers pay at least some income tax.

Personal income tax payers calculate their tax obligation under the regular system and then again using the AMT formula. The two numbers are compared and the greater amount is paid.

The original target of the AMT were those individuals who used legal tax shelters to reduce their regular income tax. However, even though most of these shelters were eliminated by the Tax Reform Act of 1986, the AMT is still paid by taxpayers in certain income levels and with certain standard deductions that trigger the AMT. For example, taxpayers who live in states that have a high income tax often pay the AMT.

The AMT has become quite controversial in recent years since it was not designed with an inflation adjustment for income. Consequently, many moderate income individuals and families -- not the original target of the AMT logic -- are becoming subjected to AMT.