Alternative Minimum Tax (AMT) was first enacted more than five decades ago and was designed to prevent wealthy individuals and families from avoiding paying the full amount of tax required by law due to deductions and other tax benefits. The AMT is a parallel tax system in addition to the regular income tax, which affects only those who meet certain criteria and has different rates and rules for computing taxable income.

For most taxpayers, the primary reason for owing AMT is that their list of deductions included amounts listed on form 6251 (i.e., large deductions for state and local taxes, miscellaneous itemized deductions, personal exemptions, etc.). AMT is a complex calculation and requires taxpayers to complete separate forms and calculate the tax in a different manner than the standard income tax.

Under the AMT system, certain deductions and credits are disallowed, which can increase the amount of taxes owed. If a taxpayer's regular income tax is less than what they owe under the AMT, deductions and credits can be disallowed. In addition, the AMT includes taxes on certain kinds of income (such as capital gains, dividends, and rental income) that are not subject to the regular income tax.

The exemption for the Alternative Minimum Tax for 2021 is set at $73,600 for single taxpayers and $114,400 for married taxpayers. For those who are subject to AMT, your taxable income is subject to a minimum tax at certain rate. The minimum tax rate is 26%. If the taxable income exceeds $198,200, the minimum tax rate increases to 28%.

Overall, the Alternative Minimum Tax works to halt misrepresentation and tax evasion by wealthy individuals and families. The takeaway for taxpayers is that if you have significant deductions and/or credits, you may owe more tax than you anticipated due to the AMT. It is important to consult with a qualified tax professional when you are familiar with the impact that the AMT may have on your finances.