It’s a pretty safe bet to say that the vast majority of folks do not have an understanding of the Alternative Minimum Tax. In this next "mini-series" of articles we’re going to try to give you just an outline of it, not a full-semester course as our title would indicate. This is an "audit" class only – there will be no exam at the end!

The AMT is often referred to as a "parallel" tax system, separate and distinct from what we’ll call the "regular" income tax. For the first hundred years of our income tax – since the Revenue Act of 1861, enacted to finance the Civil War - to the Tax Reform Act of 1969, U.S. taxpayers have had only one way to compute their annual income tax liability. For the past 40 years, however, we have had to do it two ways – with the privilege then of paying the higher of the two!

Calculating a tax liability essentially is simple math. We start by adding up a bunch of numbers representing the income we have earned during the year. This includes wages from our W-2s, interest, dividends, capital gains, alimony, pensions, rental income, royalties, partnership income, and "all other income from whatever source derived," to quote from the Internal Revenue Code. From this total we then subtract "deductions allowed by this chapter" to arrive at "taxable income." In addition to any business deductions, the "itemized deductions" we are allowed include medical expenses, certain interest, taxes such as state income, property and/or sales taxes, charitable contributions, casualty losses and "miscellaneous itemized deductions." Included in this last category are tax return preparation fees and unreimbursed employee expenses such as job travel, union dues and job-related education.

Code section 1: "There is hereby imposed on the taxable income of every individual a tax determined in accordance with the following tables…." The tax tables we use vary, depending on our "filing status" - of which there are four: single, married filing jointly, married filing separately, and head of household.

So what’s different about the Alternative Minimum Tax?

The AMT essentially follows the same basic math, but the big difference is what is included in the definition of "income" (it is more inclusive), and what deductions are "allowed" (fewer are allowed). AMT taxable income thus is, with very rare occasion, higher than our regular tax taxable income. In addition, the Alternative Minimum Tax has its own tax table, separate and distinct from the four listed above.

In our next article, we'll give some examples to show how this works.