Alternative Minimum Tax (AMT)

Definition: A separate tax system designed to keep high-earning corporations and individuals from reducing their taxes to a level that the federal government considers too low

The AMT basically amounts to a second tax system under which you may be required to figure your taxes if your income exceeds a certain level. To calculate the income at which you'll fall under AMT, you have to add various tax preferences and adjustments to your taxable income, and a $33,750 exemption ($45,000 for married filing jointly and $22,500 for married filing separately) is deducted. The exemption starts to phase out once AMT income exceeds certain levels. Determining exactly what that level is in your case is tricky, however. So it's recommended that you consult a tax advisor to find out whether you may be subject to the AMT.

Two things don't require much analysis, however. Since the AMT amounts aren't indexed to inflation, with each year that passes, you're more likely to fall under AMT. And if your company and your wealth are growing, you're more likely to become subject to the AMT as well.

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