What is the alternative minimum tax?

Answer 1

Commonly addressed in financial and tax news reports as the biggest problem faced by the Feds in upcoming budgets.

Briefly, it is a system, developed about a decade ago, that assures at least a minimum amount of tax is paid each year by everyone. essentially, tax is calculated on an income that does not allow deductions for many things. The rate is lower than the standard rate on an adjusted income. When the AMT is higher than the standard one, you pay the AMT.

Because the AMT laws were made without a Cost of Living or inflation adjustment, the number of families subject to it grows each year. It is now reaching the point, that combined with other common changes in families regular tax deductions being available, that many people will become subject to it who weren't before. The tax anticipated to be generated is part of the Federal budget estimates, so changing the law to what some feel may be more equitable, produces huge budgetary shortages - which of course would require new taxes to make up.

Official Explanation: The tax laws give preferential treatment to certain kinds of income and allow special deductions and credits for certain kinds of expenses. The alternative minimum tax (AMT) attempts to ensure that anyone who benefits from these tax advantages pays at least a minimum amount of tax.

The AMT is a separately figured tax that eliminates many deductions and credits, thus increasing tax liability for an individual who would otherwise pay less tax. The tentative minimum tax rates on ordinary income are percentages set by law. For capital gains and certain dividends, the rates in effect for the regular tax are used.

You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount. The exemption amounts are set by law for each filing status and are listed in the Form 6251 Instructions.

It's something Congress put into the tax code to keep rich people from getting out of paying "their fair share" of income taxes (note, "their fair share" isn't fair at all, when they're paying 30+% income taxes and poor people aren't paying diddly). Only they didn't index it to inflation, so in real dollars, the level at which it kicks in keeps going down every year, affecting more and more middle-class taxpayers. Instead of just indexing it, or better yet repealing it, Congress has to pass a law every year raising the limit, but they don't raise it enough, so there are still more and more people every year having to pay this tax.