The alternative minimum tax originally was designed as a parallel tax system to the regular income tax to ensure that higher-income taxpayers who take a lot of deductions pay at least a minimum amount of tax. But in recent years, the AMT has started snaring more middle-income taxpayers. The latest Internal Revenue Service figures showed 828,000 taxpayers paid the AMT in 1998 up 25 percent from the year before. First, let s look briefly at how the AMT works.
Taxpayers first calculate their regular income tax.
When calculating AMT, you add back certain adjustments and preferences that you took when computing the regular income tax. One of the biggest triggers to AMT these days occurs when taxpayers exercise their qualified incentive stock options. Under regular income taxes, you don t owe any taxes on the spread between the market price and the exercise price until you sell the shares. However, under AMT that spread is treated as income. After the adjustments and preference items are added back, you basically get to take a single allowable exemption.