Alternative Minimum Tax
The alternative minimum tax is a parallel tax system that makes it difficult for even the nimblest tax planners to escape federal income tax. It works by adding back some tax breaks back to your income, allowing an exempt amount, and then applying a 26% (sometimes 28%) tax rate. If the resulting tax is higher than your regular tax, the difference is your alternative minimum tax and is added to your tax bill.

In our alternative minimum tax calculation, we assume that the more unusual addbacks don't apply to you. We do add back the following:

• The standard deduction, if you don't itemize deductions.

• If you do itemize, we add back your state and local taxes.

• If you are taking a deduction for medical expenses, we add back the smaller of your medical expense deduction and 2.5% of your adjusted gross income.

Then, we allow an exemption of $35,750 ($49,000 if married filing jointly and $24,500 if married filing separately). This exemption is reduced if your taxable income with the addbacks is over $112,500 ($150,000 if married filing a joint return or qualifying widow(er), $75,000 if married filing separately).

The net amount is taxed at 26% (28% if over $175,000; $87,500 if married filing separately) to arrive at a so-called "tentative minimum tax". We compare the tentative minimum tax to your regular tax. If the tentative minimum tax is larger, the difference between the two amounts is your alternative minimum tax.