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AMT is really a parallel tax system. It has it's own rules regarding what is income and what is deductible.

For the most part, what is income is the same between regular tax and AMT. Incentive Stock Options are one of the bigger differences in terms of income.

It's the deductions where things get different. For individuals, it's mainly itemized deductions that are different.

Medical expenses have to be reduced by 10% of AGI rather than 7.5% in the regular tax. (Although this one is going away in 2013 as most people will get a 10% of AGI haircut for regular taxes.)

Most taxes are not deductible, including state and local income tax, sales tax, and property taxes.

Most miscellaneous itemized deductions are not allowed for AMT. That can hit employee business expenses pretty hard.

Plus the personal exemptions are not allowed, nor is the regular tax standard deduction.

In place of these deductions, AMT substitutes it's own AMT exemption. However, that exemption starts phasing out at a relatively low income, so that by the time some other items are factored in, most people paying AMT will already have their AMT exemption reduced to some extent.

In my practice, I generally see AMT start coming into play at something around $180k of income for a couple, and closer to $100k for a single person. But that's in CA, with its fairly high income tax rate. In lower tax states, it can take closer to $225k of income for a couple.

As you discovered, state taxes are often one item that will trigger AMT. The rate itself doesn't have to be that high, just the absolute dollars.

Another strange trigger is very large capital gains. While AMT uses the same tax rate for capital gains as the regular tax, all of that gain can cause the other (non-capital gain) income to be taxed at the AMT rate rather than the regular tax rates.

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