The alternative minimum tax, or AMT, is a second method of calculating federal income tax liability. The simple explanation of why the AMT exists is to ensure that high-income individuals with lots of itemized deductions pay their fair share of taxes.

With that in mind, here's a quick guide to how the AMT works, how much you might have to pay if the AMT affects you, and why it probably won't affect you in 2020.

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What is your AMT taxable income?

You can calculate your alternative minimum taxable income on IRS Form 6251, but here's the general idea:

• Start with your taxable income from your Form 1040.
• Then, add back in your standard deduction or certain itemized deductions, such as the deduction for state and local taxes (SALT deduction).
• Add back certain investment and business deductions. This list is rather long, but some of the more common items are investment interest, net operating losses, exercise of incentive stock options, and depreciation.

It's worth noting that some itemized deductions are still allowed for AMT purposes. For example, you can still use the mortgage interest deduction, medical expense deduction, and the deduction for charitable contributions.

The good news is that if you use tax preparation software, like most people do, it'll do this calculation for you. However, it's still important to know how it works so if you get hit with the AMT, you'll understand why.

2020 alternative minimum tax exemptions

Once you've calculated your alternative minimum taxable income, you may get to apply an exemption. Think of this like the standard deduction for AMT purposes. Here are the 2020 AMT exemptions by filing status -- I've included the 2019 exemptions as well for reference and comparison purposes.

Data source: IRS.

It's important to point out that not everyone can deduct the AMT exemption from their alternative minimum taxable income. Specifically, if your income exceeds the annual phaseout threshold set by the IRS, your exemption is reduced by $1 for every $4 in alternative minimum taxable income in excess of the applicable threshold, and if your income is too high, the AMT exemption can disappear completely.

Data Source: IRS.

2020 alternative minimum tax brackets

Unlike the standard U.S. tax system, which has seven marginal tax rates, or "brackets," the alternative minimum tax system has just two. The rates are 26% and 28%, and here's how they are applied to determine your alternative minimum tax in 2020.

Data Source: IRS.

And if you need the 2019 AMT brackets (for the tax return you'll file in 2020), here they are:

Data Source: IRS.

Finally, it's important to mention that your federal income tax is calculated twice each year -- once with the standard system and once with the AMT -- and you'll pay the higher of the two. In most cases (especially for middle-class Americans), the standard system results in a significantly higher tax bill thanks to the relatively large AMT exemptions.

The AMT doesn't affect nearly as many people as it used to

Prior to the implementation of the Tax Cuts and Jobs Act in 2018, the AMT looked very different. Specifically, the income thresholds at which the AMT kicked in were never indexed for inflation, so over time the tax started to apply to a greater number of households -- including many middle-class households it was never intended to affect. Plus, there were many more potential itemized deductions than there are today.

The Tax Cuts and Jobs Act made a few major changes that affected the AMT:

• The amount of income that taxpayers can exclude from their AMT taxable income has increased and is now indexed to inflation annually.
• The income thresholds at which the AMT exemption begins to phase out have dramatically increased.
• Many itemized deductions have been eliminated, which took away some major triggers for the AMT.
• The U.S. tax brackets are generally lower than they previously were, but the AMT tax brackets haven't changed.

Thanks to the higher AMT exemptions and phaseouts, as well as the generally lower marginal tax brackets in the United States and the dramatic reduction in itemized deductions that resulted from the Tax Cuts and Jobs Act, the alternative minimum tax affects very few people these days. In fact, while 5 million households paid the AMT in 2017, this number plummeted to 200,000 in 2018, the first year under the new tax law. Some tax professionals have reported that the AMT now primarily affects taxpayers who have exercised a significant amount of incentive stock options.

Having said that, when you prepare your 2020 tax return, your federal income tax will be calculated in two ways: the standard method and the AMT method. And you'll pay whichever is higher.