Understanding The Alternative Minimumm Tax

What is the alternative minimum tax?

Alternative Minimum TaxThe alternative minimum tax, frequently referred to as the AMT was first introduced over 40 years ago. The authors of the alternative minimum tax designed is so the  AMT rates would target a certain class of taxpayers that were eligible for tax  benefits such that they ended up owing very little or no tax. The alternative minimum tax scheme has been criticized over the years and as a result has undergone many changes, for instance in 1980 and the year 1990, but after nearly a half a century it remains part of our tax system.

Currently, the AMT may be considered to be an “extra” tax that some taxpayers have to pay beyond their regular income tax obligation. Although a number of changes and modification have been made over the years, the original purpose of the alternative minimum tax remains today. That is, to ensure that certain high income individuals and households could not take advantage of special tax benefits such that they to avoid paying what the IRS sees as their fair tax obligation.

But the broad application of the AMT can have unfair consequences (perhaps too many). For example, high income individuals and households who do not require special tax advantages may still be exposed to the alternative minimum tax.

Alternative Minimum Tax – Theory

In theory, the AMT is supposed to fix the minimum tax that a person at a certain income levels would have to pay. That is to say that it should work out that that a taxpayer who already pays the minimum would then not have to pay AMT. If, on the other hand, their regular tax amount falls below the minimum they would be obliged to pay the difference between the tax rate and the AMT.

One problem with the AMT tax scheme is that it can be confusing and complicated to determine the actual tax owed. For example, in some cases a taxpayer calculating the alternative minimum tax may have to factor in a large item on their tax return such as the interest they claimed on a second mortgage or, perhaps, for a deduction taken for state income taxes.

Generally speaking, taxpayers of modest means should not be exposed to the AMT but changes in the law over the years have created several bizarre circumstances where this can occur. There have been demands for more changes in the alternative minimum tax to avoid this unfair outcome but, but as of yet this has not occurred in any meaningful way.

To determine whether you will be exposed to the alternative minimum tax you should have is to have a tax professional prepare your taxes, by completing Form 6251.

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