AMT – The Most Hated Tax of All

Friday, July 31, 2015 | Leave a comment

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The Tax Policy Center has dubbed the Alternative Minimum Tax the epitome of pointless complexity. It is called that for good reason since the AMT is a parallel income tax system. Figuring out whether you’re subject to AMT means calculating your liability twice – once under the rules of the regular income tax code, and once under the AMT rules. The bottom line is whichever amount is higher is what you pay.
The AMT is one of the most hated taxes in the United States. For those individuals above a certain threshold of taxable income, or corporations, trusts, and estates, the AMT creates a higher tax burden beyond that imposed on those that fall under the threshold and it is now creeping into middle class as well.

The alternative minimum tax was first originated with the thought that those individuals and corporations in the higher tax bracket were able to find and utilize large tax breaks that the middle class could not. It was decided that the AMT would ensure that those with the highest incomes would pay a minimum tax rate regardless of the tax breaks and loopholes they may have available to them.

The current AMT was enacted in 1982 and is applied to all taxable income when an individual or entity’s taxable income falls above a pre-determined level. In 2013, that level was tied to inflation, or CPI rates. As it stands now, the alternative minimum tax rates are 26 and 28%, and to determine whether or not you are subject to regular tax rates or the AMT rates, you would be required to calculate your taxes twice. This can become problematic as the AMT does not allow the same deductions as the regular tax does, so your adjusted income levels will be different.

It can become quite complicated to determine if you are subject to the AMT as well as what deductions are allowed and which are not. Often, the best course of action is to contact a qualified tax accountant to walk you through the process.

Non- wealthy households most vulnerable to the AMT typically:

Live in a high tax state and city: You’re not allowed to deduct state and local income taxes or property taxes under the AMT even though you may do so under the regular code. That means those in New York and California among others are particularly vulnerable.

Have a big family: Every child you have is a personal exemption on your 1040. Personal exemptions are disallowed under the AMT.

These two reasons go a long way in explaining why tax experts think that the AMT is poorly targeted. Although many think that it would make sense for lawmakers to either repeal the AMT altogether, it will probably never happen  because that means that they would have to find another source of revenue to make up for the loss of roughly $385 billion dollars that the AMT is expected to raise over the next decade.

The AMT is hated for good reason. It’s complicated and some would say creates a separate class of citizens that is being penalized for their financial success.

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