Question

Which of the following statements regarding the alternative minimum tax is TRUE?

1) The tax bracket will determine whether the regular tax or the alternative tax is paid.
2) The alternative minimum tax is added to the regular tax.
3) The excess of the alternative tax over the regular tax is added to the regular tax.
4) The lesser of the regular tax or the alternative tax is paid.

Answer 1

The correct answer is that the excess of the alternative tax over the regular tax is added to the regular tax. The alternative minimum tax is a parallel system to ensure higher-income earners pay a minimum amount of tax.

Step-by-step explanation:

The correct statement regarding the alternative minimum tax (AMT) is the third option: the excess of the alternative tax over the regular tax is added to the regular tax. The AMT is a parallel tax system that operates alongside the regular income tax. It ensures that individuals and corporations that benefit from certain tax advantages pay at least a minimum amount of tax. Taxpayers have to calculate their tax liability twice - once under the regular income tax rules and again under the AMT rules. They then pay the higher of the two.

The purpose of the AMT is to prevent high-income earners from paying too little income tax by taking a variety of tax deductions and credits. It does this by adding back certain tax preferences into a taxpayer's income and recalculating the tax using a separate set of rules and rates, which can result in a higher tax liability.