Alternative Minimum Tax - Explained
What is an Alternative Minimum Tax?
If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
Table of ContentsWhat is an Alternative Minimum Tax?How Does an Alternative Minimum Tax Work?Strategies to Reduce AMT Academic Research for Alternative Minimum Tax
What is an Alternative Minimum Tax?
The alternative minimum tax calculation is done in parallel with the taxpayer's regular income tax calculation. AMT has discarded numerous preferential tax provisions to benefit the taxpayer; however, it also intends to ensure that high-income people at least pay a minimum tax.
How Does an Alternative Minimum Tax Work?
AMT has removed some preferential tax provisions like non-taxable part of capital gains, stock options, Canadian dividends, tax shelter losses and equity interests in limited partners or corporation setting. Preferential tax treatment implies that tax rate is more suitable than that imposed to usual wages and interest incomes.Tax payers need to pay more between normal tax and AMT. A taxpayer must pay the minimum tax in case if it is more than the federal tax, computed in the usual manner. The minimum tax is to be paid if any of these elements are deducted:
- a taxable capital gain or loss, including share of loss from the partnership that is caused by the capital cost allowance
- deduction related to rental property
- a loss of limited partnership
- a loss arising from deducting the resource expenses from the depletion allowance
- financial expenses related to investments
- development expenses, or the expenses for Canadian oil property and gas
- stock options for a labor-sponsored fund
- a loan for relocation of employees
- a tax credit for the federal political contributions
- investment tax credit
- a federal dividend tax credit
- tax credit for employment across the border.
Strategies to Reduce AMT
If you have AMT more than your normal income, determine the ways to decrease the income that has been treated tax-preferentially, or has discretionary deductions for the coming years. If you have higher AMT, you may use the limiting Registered Retirement Saving Plan deductions for increasing the normal tax payable and carry forward the deduction balance to the next year. People earning huge amount of dividends from their business may increase their employment income. If the taxpayer is getting benefited from the 100% deductions for depreciation on self-employment, or leasing, he should decrease expenses and defer them to the coming year. Trading investment portfolios also helps earning full-rate income, like interest income, rather than dividend income. If you are paying the ATM this year, but not in the next year, you can claim the credits in computing your tax for this year for former minimum tax payments.