The Alternative Minimum Tax (AMT) is a little-understood chapter of the U.S. tax code. In fact, the AMT represents an entirely separate and parallel set of calculations for determining taxable income. The AMT was designed to collect more taxes from wealthy individuals who take advantage of deductions and tax-sheltered income to lower their taxable income to close to zero.
The AMT excludes personal exemptions and some common itemized deductions — like state and local taxes, and child care credits — when calculating taxable income [source: The New York Times]. If you have a lot of dependents and live in a high-tax state like California or New York, the AMT can raise your taxable income considerably. By design, the amount of tax owed under the AMT will always be higher than under the regular tax code.
If you use tax preparation software, your tax program will run your income through the AMT rules and see if you qualify. If you do taxes by hand, you need to do the math on Form 6251.
Because the AMT excludes so many categories of deductions, the IRS offers an AMT exemption. In 2014, the AMT exemption is $52,800 for single filers and $82,100 for married couples filing jointly [source: IRS]. This exemption is subtracted from your taxable income similar to the way that the standard deduction is applied under the regular tax system.