Problems with the Alternative Minimum Tax

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What Is the Alternative Minimum Tax?

The alternative minimum tax (AMT) is an income tax that the U.S. federal government imposes on individuals, estates, trusts, and corporations. It is imposed at an almost flat rate on a certain amount of adjusted taxable income that is over a specific threshold, which is also called an exemption. The exemption is significantly greater than the exemption from the usual income tax.

While the regular income tax excludes specific types of income, and offers deductions and credits for particular expenses, the purpose of the AMT is to make certain that individuals and corporations that derive benefits from specific exclusions, deductions, and credits, are required to pay a minimum amount of tax.

The alternative minimum tax is the amount of the tentative minimum tax in excess of the regular tax. Therefore, a taxpayer owes the alternative minimum tax only in cases where the tentative minimum tax exceeds the regular tax.

Impact of the AMT

Some critics of the alternative minimum tax have often called for its repeal because they claim that it unfairly affects millions of families who are not considered to be high-income earners. And the number of individuals impacted by the AMT has dramatically increased over the years. For instance, in 1997, 605,000 taxpayers paid the AMT, and 11 years later, 3.9 million taxpayers were subject to the alternative minimum tax; this figure represents approximately 4% of individual taxpayers. In 2008, 27% of households that were impacted by the AMT had $200,000 or less of adjusted gross income.

The main reason for the increase in the number of families affected by the AMT is that the AMT was not adjusted for inflation prior to 2013, as is the case with regular income tax. As a result, families’ incomes adjusted to inflation, and went beyond the level at which you were eligible to pay the alternative minimum tax.

Inequalities Created by the Alternative Minimum Tax

Those opposed to the AMT have also pointed out some of the inequalities created by the tax. For example, taxpayers are not permitted to deduct taxes on the state and local levels in calculating their AMT. Consequently, taxpayers who reside in states that have high income tax rates are more likely to be subject to the AMT than those who reside in states that have lower income tax rates.

In addition, taxpayers are not permitted to deduct personal exemptions when determining their alternative minimum tax liability. Because of this rule, taxpayers who have large families, especially those with three or more children, are more likely to be subject to the AMT than smaller families.

Should the AMT Be Repealed?

Critics of the AMT have often stated that because of the inequalities created by the AMT, as well as its effect on taxpayers who were not its intended target, the AMT should be repealed. In addition, since it was not indexed to inflation prior to 2013, many middle-income taxpayers were required to pay the tax.

However, because the marginal tax rate of taxpayers earning $1 million is 39.6%, and the alternative minimum tax applies a 26% or 28% tax rate on income, millionaires are largely unaffected by the AMT. For these reasons, some have suggested that the alternative minimum tax be repealed. And others have recommended that the AMT be reformed in such a way that it has little or no effect on the middle-class.

Should I Consult an Attorney?

If you would like to find out if you are subject to the alternative minimum tax, you should consult a tax attorney who can help you by navigating through the instructions and worksheets needed to make that determination.

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Last Modified: 06-03-2015 09:27 AM PDT

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