The alternative minimum tax (AMT) exemption is a base amount people use when determining if they owe any AMT in a given year. Tax authorities originally created the AMT to avoid situations where wealthy people used a variety of loopholes in the tax code to avoid paying taxes. Under this system, people must compare their total tax liability on regular income tax forms with their AMT liability. If the AMT liability is greater, and the amount is higher than the exemption, the taxpayer owes some extra tax.
Originally, the purpose of the AMT was to address some of the most wealthy taxpayers. One problem with the system has been the failure of the AMT exemption to keep pace with inflation, resulting in situations where people end up owing taxes under the system despite having middle class incomes. The government periodically adjusts the amount to address this problem, but the adjustments do not always move quickly enough.
To determine if people owe additional taxes, it is necessary to fill out a form 6251. On this form, people declare their income just like they do on regular taxes, and are allowed to take a series of deductions. There are not as many deductions available as with conventional tax forms. At the end of the form, people write down their tax liability according to their calculations. If the liability is lower than the AMT exemption, they do not owe any extra taxes and they can proceed with their regular tax return.
In cases where the amount is higher than the AMT exemption, the taxpayer owes additional taxes on the income above the cap. The precise amount varies, depending on current policies, but can be substantial in some cases. People submit this along with their regular income taxes. There are some steps people can take to try and fall beneath the AMT exemption to avoid this tax problem, and an accountant can offer advice and assistance on the basis of an individual financial situation.
One issue with the AMT is that many taxpayers are not aware of it, or think it applies only to very wealthy people. As a result, sometimes people are surprised by an IRS audit that ends in a demand for back payment of AMT along with fees. Taxpayers should talk to their accountants about whether they need to complete a form 6251 to determine if they owe extra taxes. If there's any doubt about falling below the AMT exemption, they should fill out the form to be on the safe side.