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An alternative method of calculating income tax liability. The AMT system requires you to include in your alternative minimum taxable income (AMTI) a number of "tax preference items" and deductions under the regular income tax rules. First you compute your tax liability as you normally would by completing your IRS Form 1040 tax return. Then you separately recompute your taxes under the AMT system by following its special rules. (See IRS Form 6251 and its line-by-line instructions.) You compare your AMT to the regular tax you owe and pay the higher amount (technically, AMT is the amount over your regular tax). The AMT rates are 26% and, for very high incomes, 28%.
When you exercise incentive stock options (ISOs) and hold the ISO stock, the excess of the fair market value of the option shares over the exercise price, while not taxable for the regular income tax calculation, is a tax preference item that is part of your AMT calculation. No AMT applies when you sell the stock in the calendar year of exercise. If you do incur the AMT, you will have an AMT credit you can use to reduce the taxes you owe in future years.
For details on ISOs and the AMT, see the relevant section elsewhere on this website.
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