How does the Alternative Minimum Tax (AMT) function?

The Alternative Minimum Tax (AMT) operates by imposing a separate tax calculation to ensure that all taxpayers, particularly those with higher incomes who may benefit from certain deductions and credits, still pay a minimum level of tax. This tax system was designed to prevent high-income earners from using loopholes and tax preferences to significantly minimize their tax liabilities, ensuring they contribute a fair share of taxes.

Under AMT, taxpayers calculate their tax liability twice: once under the regular tax rules and again using the AMT rules. The AMT adds back certain deductions that are allowed under the regular tax calculation, such as state and local taxes, along with some other tax benefits, effectively creating a broader tax base. If the AMT calculation results in a higher tax than the regular calculation, the taxpayer must pay the AMT amount, ensuring that they meet at least the minimum tax requirement.

This structure is particularly relevant for those who otherwise might be able to reduce their tax obligations significantly through various deductions and credits available in standard tax computations. As a result, the AMT serves as a safety net in the tax system, putting a floor under how much tax must be paid, hence its key function of enforcing a minimum tax payment.