Alan L. said:
The AMT was designed to catch people that weren't paying taxes because of deductions. Supposedly higher income people, but it is catching more people now.
Basically there are some deductions that aren't allowed for AMT vs regular tax, some different depreciation methods allowed. For example taxes (other than related to a business or a rental property) are not deductible for AMT. Neither are miscellaneous itemized deductions. Medical expense have a bigger floor for AMT.
Make all of the adjustments to income, subtract an AMT exemption amount (which phases out at higher income levels) and multiply the result by 26%, then compare to regular tax and if more, you have some AMT ("alternative minimum tax".
It is truly a parallel tax system and when it comes into play there can be varying amounts for regular vs AMT such as net operating loss carryovers, passive loss carryovers, investment interest carryovers, etc. Thank God for tax software.
If you find you are paying AMT there are a few things you can do. For example if you have some raw land you are holding for investment you can elect to capitalize the taxes on it to be offset against future gain rather than lose the deduction completely due to the AMT.
This is a pretty good synopsis. Let me just add a few things.
The reason for the imposition of this tax is that some people (and corporations) were able to arrange their finanical affairs in such a way as to completely eliminate all income taxes. They weren't cheating, just using tax provisions to their advantage. We all do this. In my own case I maximize my tax sheltered savings through my employer (403(b) and 457(c) savings plans) and have a SIMPLE and Roth IRA from my side job income. Fortunately tax sheltered savings is NOT one of the adjustments mentioned above.
The first iteration in the process was something called the
regular minimum tax. You paid the larger of the
regular minimum tax, OR your
regular income tax.
After seeing some problems with this system, congress created a third sytem called the
alternative minimum tax. Now your tax liability was the larger of your
regular income tax PLUS
the regular minimum tax, OR the new
alternative minimum tax.
Finally after taxpayers ******* about the complexities of three parallel tax systems it was changed to its current model. The
tax preferences from the
regular minimum tax were combined with the
+/- adjustments of the
alternative minimum tax to form the AMT of today. This all happened in the 1960's and 70's I believe.
The reason why more people are subject to this tax today is due to to the fact that taxes at the state and local level are not deductible as itemized deductions. As state and local taxes have risen due to reduced federal revenue sharing and Medicade mandates, states and their insturmentalities have been forced to raise taxes.
There are actually several tax rates, not just the 26%. This applies to the first $175,000 of tax base, then the rate rises to 28%. Further dividends and long term capital gains that are subject to the 5% and 15% tax rates for regular income tax are subject to that same rate here.
I agree with the poster quoted - thank god for tax software. It does most of the work for you. However there are a few adjustments that would not be picked up automatically by tax software, such as stock options granted by employers.
One of the few things that Democrats and Republicans say that agree upon - there needs to be another rethinking of this tax to reduce its impact. Being the cynic that I am, I quesiton their resolve, since nothing permanent has been done, and it is beginning to raise big tax dollars which are hard to gve up in deficit spending times. As you may know, they did some tinkering with this tax just last week, passing a tax bill to increase the exemption for it, yet again.
I have been a tax professor for the last 31 plus years. I will be retiring at the end of April. I have really enjoyed teaching the subject due to the challenge, but as a citizen and taxpayer, it is maddeningly complex - way too complex.
