The alternative minimum tax is designed by the legislators to impose an additional tax on high-income taxpayers. The first step in determining alternative minimum tax is to calculate alternative minimum taxable income by subtracting from the alternative minimum tax exemption. Here is an example to explain it.

1. An individual taxpayer has a regular taxable income of $87,000.
2. The taxpayer excludes the exercise of incentive stock options from gross income.
3. The taxpayer contributed $6,100 to the purchase of stock with an FMV of $26,000.
4. The alternative minimum tax exemption for one person is $81,300.
5. After the AMT exemption, what is the alternative minimum taxable income for the taxpayer?

The Alternative Minimum Taxable Income is the final amount used to determine tax on AMTI income before and after. Therefore, in this instance, we will add income and deductions that are disallowed by the Internal Revenue Service due to high income. We'll add the ISO exercise option back to income and subtract the amount paid to buy ISO because it was excluded from it. Before the AMT exemption, AMTI is $106,900, which is equal to $87,000 plus $26,000 minus $6,100, and then drops by $25,600 after the AMT exemption.