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Alternative Minimum Tax (AMT)

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Alternative Minimum Tax

The AMT makes tax time even more annoying and complex.

Photo credit: Getty Images

What Is the Alternative Minimum Tax?:

The Alternative Minimum Tax (AMT) is an alternative way to make sure everyone pays at least a minimum in tax. It was was created in 1969 when it was discovered that many wealthy individuals paid no taxes at all, because they were using tax deductions not available to the average worker. In response, the Alternative Minimum Tax was created to factor back in those deductions and apply a higher tax rate if the resultant estimated income reaches a certain level.

That's the really annoying part about the AMT. If you are at that income level, you've got to calculate your taxes twice -- once for the regular income tax, and once for the AMT. Why? To add insult to injury, you've got to pay the higher tax.

The other annoying part about the AMT is that it was never indexed to inflation. In other words, the income level in the law was set to 1969 levels, which would include just about everyone. To keep that from happening, Congress had to pass a "patch" each year that raised the trigger point. Without the patch, families with incomes as low as $30,000 would be subject to the AMT. While the patch protected these families, it also created a lot of uncertainty.

How Is the AMT Different?:

The AMT is different from the normal tax rate because it doesn't have the standard deduction or personal exemptions. It also doesn't allow some itemized deductions, such as the interest on home equity mortgages, state and local taxes, and foreign tax credits, to name just a few. The AMT might also include other income streams not counted by the regular income tax. For that reason, the AMT tax might be higher than the regular tax.

The AMT tax rate is a little simpler than the regular tax brackets. If your income is subject to the AMT tax, the rates are 26% on the first $175,000 of AMT taxable income, and 28% on the rest. The AMT taxable income isn't your whole income, just the portion that's above a certain income level.

Who Has the Pay the AMT?:

You only have to worry about the AMT if you adjusted gross income is above a certain level. Here's the really good news: Congress passed a law to avoid the fiscal cliff in 2013. In that law, the Congress permanently set the trigger income levels, and added that they would be adjusted for inflation. That means you pretty much know every year whether you might be subject to the AMT.

The income levels for the 2012 tax year are as follows:

  • Single or Head of Household: $50,600.
  • Married Filing Jointly or Widow(er): $78,750.
  • Married Filing Separately: $39,375.
If you make that income or above, you've may have to calculate the AMT and pay the higher tax. You can do so on your tax form, and most tax software packages do it for you. You can also go to the IRS AMT Assistant. For more on the AMT, and some good tax tips, see the article from the About.com Guide to Taxes, William Perez Alternative Minimum Tax.

How Does the Alternative Minimum Tax Affect the U.S. Economy?:

Why hasn't Congress ever gotten rid of the unpopular Alternative Minimum Tax? Our elected officials can't turn down the additional revenue. The AMT produces around $60 billion a year in Federal tax revenue from primarily the top 1% of taxpayers.

History of the AMT:

The AMT was originally known as the millionaires' tax. That's because it was designed, in 1969, to make sure millionaires didn't get away tax free. However, it was expanded during the Reagan Administration to include more widespread exemptions and deductions, like the personal exemption, state and local taxes, and the standard deduction. It even targeted deductions like union dues and some medical costs. On the flip side, Reagan's AMT tax reform got rid of some of the more exotic investment deductions that were used only by the very wealthy. (Source: New York Times, Alternative Minimum Tax) Article updated January 3, 2013

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