The alternate minimum tax can be defined as the tax that recalculates income tax after adding back certain tax preference items back into adjusted gross income. To calculate the taxable income the alternate minimum tax has separate set of rules. Under this method, the preferential deductions are added back into the income of the taxpayer and then the AMT (alternate minimum tax) exemption is subtracted to determine the final taxable figure. AMT (alternate minimum tax) is designed to keep the taxpayers away from tax evasion through tax breaks.  

The objective of the AMT is to ensure that every one pays at least some income tax. For this reason, AMT calculations effectively eliminate several types of deductions and credits creating a tax liability for a person who would otherwise little or no tax.

The system of AMT calculation is very complicated and controversial. The elimination of many deductions and credits particularly effect people with more number of itemized deductions, people with many children or dependents people who exercise incentive stock options, and those who pay high state and local taxes or high personal property taxes. As the AMT thresholds have not been frequently adjusted for inflation more middle income tax payers’ are liable to pay the alternate minimum tax.

The AMT taxpayers are required to take the assistance of professionals to calculate their tax liability as the process is very complicated and need expert opinion. As the AMT system does not allow the standard deduction if a assesse claims the standard deduction then in that case the individual will not be able to claim itemized deduction for the AMT.

The difference between the taxpayer’s AMTI (alternate minimum taxable income) and his AMT exemption is taxed as per the relevant tax slab rate. If the tentative minimum tax is higher than the taxpayer’s regular tax liability then in that case the taxpayer has to pay the regular tax plus the amount by which the tentative minimum tax exceeds the regular tax.

The example of minimum alternate tax with a problem is stated below

ABC LTD has the taxable income as per the normal provision of the income tax act Rs40 lakhs and book profits of Rs75 lakhs for the financial year 2019-20

Tax payable will be higher of the following two

[email protected]% PLUS 4%=1248000

Tax liability as per the AMT provisions will be

[email protected]% plus 4 %=1443000

AMT credit will be 1443000-1248000=Rs195000

This tax credit shall be carried forward for 15 assessment years immediately following the assessment year in which such tax credit has been eligible for deduction. This is with effect from assessment year 2019-19 prior, to which alternate minimum tax has been allowed to be carried forward for a period of 10 assessment years. The alternate minimum tax shall be allowed to be set off in year when the tax becomes payable on the total income in accordance with the normal provision of the income tax act.