Question

Which of the following statements about the alternative minimum tax (AMT) of an individual is correct?

A. AMT credits may be carried forward to future tax years.
B. It is determined from the tax rate schedules and computed on income that exceeds $100,000.
C. It is calculated after certain tax preference items that may be used as an alternative to the regular tax are deducted.
D. It is computed on an individual’s regular taxable income at a rate of 28%.

Answer 1

The correct answer is A. AMT credits may be carried forward to future tax years. The AMT ensures that taxpayers with significant deductions and credits pay a minimum amount of tax and applies different rules and rates than the regular tax system.

Step-by-step explanation:

The correct statement about the Alternative Minimum Tax (AMT) for individuals is A. AMT credits may be carried forward to future tax years. The AMT is designed to ensure that certain taxpayers pay at least a minimum amount of tax, regardless of deductions, credits, or exemptions. It operates alongside the regular tax system and requires some taxpayers to calculate their liability twice—once under the regular income tax system and once under the AMT—and then pay the higher amount.

Taxable income is typically the adjusted gross income minus any deductions and exemptions. However, AMT uses a broader definition of taxable income to include certain items excluded or limited under the regular tax rules. AMT credits that originate in years when the AMT is paid may be carried forward to reduce the regular tax in future years, to the extent that it exceeds the AMT in those years.

Furthermore, the AMT tax rates are not directly determined from the tax rate schedules that apply to regular income tax, but rather they are set at a flat rate of 26% or 28% for income levels above a certain exemption threshold. This is different from the regular tax system's marginal tax rates, which increase as income increases. Therefore, option B, C, and D are incorrect.