Understanding the Alternative Minimum Tax

What is AMT tax?  Alternative minimum tax (AMT) is a federal tax that runs parallel to regular tax.  It increases your taxable income by adding items that are tax-free under the regular tax system and disallowing many deductions.  Complete form 6251 to determine if you owe additional AMT.  If the tax on form 6251 is more than the tax calculated on your regular tax return, you will need to pay the difference.

Consider the original intent of AMT

The AMT was originally intended for the wealthy but ended up affecting the middle class for many decades.   Even though this tax was originally targeted to the wealthy, they ended up paying little or none of this tax after deductions.   To keep the tax aimed at the wealthy, taxpayers were allowed an AMT exemption which originally was set at $45,000.  At the time, that was high enough to miss the middle class.

For years, the tax wasn’t altered to account for inflation and it ended up hitting middle class households.  Every year it threatened to affect more and more middle class households.  Congressional action almost every year increased the exemption threshold to free the middle class of this debt.

Compare it to regular tax

The AMT rates are between 26 and 28 percent for incomes over the threshold.  Compare this to regular tax rates of 10 to 35 percent.  The AMT tax percentage is higher in some instances.  Now take into account the many items you can’t deduct.  This is the reason why congress had to step in and alter the exemption threshold yearly.

Changes in AMT

A change to the AMT decreased the threshold for exemption.  It is now indexed to inflation, which allows the exemption limit to increase accordingly.  In the first year of this change the exemption was increased to $78,750 for households and $50,600 for individuals.  This will save millions of middle class households hundreds to thousands of dollars.

Understanding the impact

Prior to the change, the Tax Policy Center, confirmed that 4 million taxpayers owed the AMT and this was an increase of 1.3 million in a ten year period.  In addition, 28 million families were expected to pay an average of $3,400 in extra taxes.   Indexing the AMT to inflation created a tax savings in the thousands for families that weren’t originally intended to pay the tax.

AMT is a tax that runs in the background of regular tax.  It was originally designed for the wealthy and ended up affecting many middle class families for years.  Completing form 6251 will help you calculate what your AMT tax is.  For many years, congress had to step in annually to alter the threshold.  However, many families were still affected.  The change that indexed AMT to inflation adjusted the threshold and saved millions of middle class families hundreds to thousands of dollars.

Source: www.irs.govwww.business.time.com

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