The AMT operates as a parallel tax system to the regular tax system with its own definition of taxable income, exemptions, and tax rates. It was originally called the "millionaire's tax", in that it targeted only the wealthiest households. The income triggers were not indexed for inflation so as incomes rose the AMT touched more of the middle class. Without periodic Congressional action to temporarily raise the income limits that trigger the AMT, almost a quarter of the United States' 90 million taxpayers could be required to pay the tax.

In practice, taxpayers must compute tax owed under the "regular" and AMT systems and are liable for whichever is higher. The AMT system has in general a broader definition of taxable income, a larger exemption, and lower tax rates than the regular system. For taxpayers subject to the AMT, it means that a portion of their itemized deductions are effectively eliminated, and thereby increases the tax they owe the federal government vs. the regular tax system.

Each year a taxpayer must pay the greater of an Alternative Minimum Tax (AMT) or regular tax. The AMT is a nearly flat tax on taxable income as modified for AMT. As with regular Federal income tax, rates and exemptions vary by filing status. The lower rate and the exemption are phased out above certain income levels at 25% of AMT income. A lower rate applies (through 2010) on capital gains (and qualifying dividends). These amounts for 2009 are reflected in the following table:

In addition, corporations with average annual gross receipts less than $7,500,000 for the prior three years are exempt from AMT, but only so long as they continue to meet this test. Further, a corporation is exempt from AMT during its first year as a corporation. Affiliated corporations are treated as if they were a single corporation for all three exemptions ($40,000, $7.5 million, and first year).

To the extent AMT exceeds regular Federal income tax, a future credit is provided which can offset future regular tax to the extent AMT does not apply in a future year. Regular tax for computing AMT is individual Form 1040 Line 44 or corporate Form 1120 Schedule J line 2 less foreign tax credit.

Under the AMT, no deduction is allowed for personal exemptions, nor is the standard deduction. State, local, and foreign taxes are not deductible. However, most other itemized deductions apply at least in part. Significant other adjustments to income and deductions apply.

Individuals must file IRS Form 6251 and corporations must file Form 4626 if they have any net AMT due. The form is also filed to claim the credit for prior year AMT.

Other individual adjustments in computing AMT include:

Many AMT adjustments apply to businesses operated by individuals or corporations. The adjustments tend to have the effect of deferring certain deductions or recognizing income sooner. These adjustments include:

Certain other adjustments apply. Corporations are also subject to an adjustment (up or down) for adjusted current earnings. In addition, a partner or sharehlolder's share of AMT income and adjustments flow through to the partner or shareholder from the partnership or S corporation.