5.1.3 Alternative Minimum Tax
The alternative minimum tax, or AMT, is an alternative way of calculating income taxes. It was created as a backstop to make sure wealthy taxpayers could not avoid paying any income tax at all. The AMT is often called a “parallel” tax system since it is not truly an alternative, optional way of calculating your income taxes. Instead, taxpayers are required to calculate their alternative minimum taxable income (AMTI) and pay the tax on this amount if it is greater than what they owe under the regular income tax calculation. However, most Americans do not have to worry about paying the AMT, since it primarily hits higher income taxpayers. For the very highest earners, however, the AMT is less of an issue, since the top marginal federal income tax rate is higher than the maximum AMT rate. This means the mega-rich usually pay a higher tax bill with the regular tax calculation than via the AMT method.
With regards to the Series 66, know that certain tax deductions, credits, and exclusions do not receive favorable tax treatment under the AMT. Instead, these “tax preference items” must be added back to taxable income.
Here are some common differences with the AMT:
• Municipal bonds are a top investment choice for high-income earners, because the interest on municipal bonds is generally tax exempt. However, if a taxpayer is subject to the AMT, and the taxpayer owns a municipal bond that funds a “specified private activity”—such as a private sports stadium, housing development, or a hospital—then interest from that “specified private activity” must be added back to income. For this reason, municipal bonds that fund specified private activities may be called “AMT bonds.”
• State and local taxes are