What Triggers the Alternative Minimum Tax (AMT)?

The AMT with rates of 26% and 28% is a particularly vicious tax that may hit you if you have any of the following circumstances during the year:

1. Large state and local tax deductions under itemized deductions which are not deductible for the AMT. I find this is the most common reason for AMT.
2. Large miscellaneous itemized deductions which are not allowed at all for AMT.
3. Many dependents. The standard deduction and the personal exemption deduction are not allowed for AMT.
4. Tax exempt income from private activity bonds.
5. Large long term capital gains or qualified dividends. Both are taxed at the same rate for the regular tax and the AMT. However if you have a large amount of such income, the regular effective tax rate is reduced and can bring AMT into play on the other taxable income.
6. Exercise of incentive stock options. If the stock is sold before year end in the same year of exercise, then there is no add back to alternative minimum taxable income.

You compare the regular tax to the AMT and pay the higher of the two. The AMT is calculated on form 6251.