by M. J. Joachim

Created on: February 23, 2010

America has two tax systems, regular income tax and the Alternative Minimum Tax (AMT). Most of us are familiar with regular income tax. We include deductions for dependents, home improvement loans, medical expenses and miscellaneous items and investments. After doing so, we calculate the amount of tax owed so we can pay it. If however we made too much money, the Alternative Minimum Tax is applied.  This tax essentially eliminates most, if not all, of our personal and itemized deductions.

*Effects of Alternative Minimum Tax

The AMT was developed in 1969. The goal was to prevent rich people from finding ways to avoid paying their taxes by using loop holes in the regular tax law. Since that time, AMT has been revised and now is imposed on millions of middle class Americans. Three major impacts of AMT are higher taxes, lower savings and difficult tax preparation (complete with penalties if you get it wrong). The AMT affects your taxes in the following ways:

~Increases Regular Tax Rate: If you would owe more taxes under AMT than your regular tax bill, you will be required to recalculate the income you are currently taxed on and pay the higher amount. This means that the government (using two parallel tax systems) has the right to make you pay more than your regular expected income tax.

~Changes or Eliminates Personal Credits, Deductions and Exemptions: If you choose to use a simple tax form and claim your expected deductions on it, but your deductions are higher than your regular liability, you are required to pay the difference through AMT rules, amounting to double taxation.

~Complicates Income Tax Preparation for Individuals: Special tax forms have been developed for you to delete expected tax write offs so you can pay the higher tax rate. Under the regular tax code, you are able to take deductions for state, local and property taxes. AMT uses a complex formula to eliminate tax breaks for these and other expenses you’d expect to receive and not get taxed on.

According to the Economic and Budget Brief from the Congressional Budget Office, “After 2010, however, the use of all personal and business tax credits will be limited by the AMT. After that year, taxpayers with AMT liability will not be able to use those credits, and other tax payers may use business and personal credits only to the extent that their regular tax liability exceeds their AMT liability.”

*Who Pays AMT?

For years Congress has been “patching” the AMT to limit the amount of middle class citizens paying it. Despite this, more than 25 percent of families making between 75K and 100K annually pay AMT. Over 35 percent of taxpayers earning between 100K and 200K pay AMT and more than 60 percent of taxpayers with incomes 200K or higher pay the AMT tax. “If nothing is changed this year (2010), one in six taxpayers will be affected by the AMT, paying on average an additional $3,900 in tax, and nearly every married taxpayer with income between $100,000 and $500,000 will owe some alternative tax,” states the Economic and Budget Brief from CBO.

*References and Supplemental Reading

Economic and Budget Brief, Congressional Budget Office: The Individual Alternative Minimum Tax

Turbo Tax, Alternative Minimum Tax: Common Questions

Tax Guide for Investors: Alternative Minimum Tax 101

 

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