The Alternative Minimum Tax (AMT) ensures high-income taxpayers pay a minimum amount of income tax, but amendments in 1986 shifted its focus to upper-middle-class taxpayers. It is a complex parallel tax system that requires taxpayers to calculate their obligations under both systems and pay the higher of the two. Tax strategies to avoid paying the AMT can be complex and confusing.
The Alternative Minimum Tax (AMT) is a feature of the US tax code designed to ensure that high-income taxpayers pay a minimum amount of income tax, regardless of how many deductions and tax credits they may include on their tax returns. Enacted in 1970, it was Congress’s response to the Treasury Secretary’s assertion that in 1967 legal manipulation of tax deductions and credits had allowed 155 high-income families to pay no income tax at all. Originally designed as a supplemental tax, its primary target was wealthy investors who used exotic deductions and credits to pay a very low effective tax rate. His main goal was to ensure that all taxpayers paid at least their fair share.
However, when it was amended in 1986, the subtle changes to the specific deductions shifted its focus to upper-middle-class taxpayers who owned their own homes, had children, and lived in high-tax states, a much more significant percentage of all taxpayers. It also became a much more complex parallel tax system. Taxpayers calculate their tax obligations under both systems and must pay the higher of the two. Congress periodically modifies the tax brackets of the AMT; in 2010, for example, the rate was 26% of all income up to $175,000 United States Dollars (USD) and 28% of all income above, regardless of marital status. The personal deduction was $47,450 for single filers and $72,450 for married couples filing jointly.
Prior to the 1984 tax code revision that indexed “regular” tax brackets to inflation, many Americans complained about the “sliding bracket” problem, an issue that regularly comes up in AMT discussions. It was said at the time that inflation was a hidden tax because the wage increases people received to keep up with inflation pushed them into higher tax brackets, resulting in a real loss of purchasing power because they were paying a higher tax rate. higher tax rate than what was essentially the same income. However, despite having indexed the standard tax code for inflation two years earlier, when Congress reformulated the AMT in 1986, it did so without indexation. Even with the periodic changes that Congress makes to the AMT tax brackets, more US taxpayers are subject to the AMT each year.
Without completing the worksheet each year, it is difficult to predict whether a taxpayer will be subject to AMT, and tax strategies to avoid having to pay it can be complex and confusing. Low-income taxpayers are not affected by this, and higher-income taxpayers are generally not affected either, because they pay higher effective tax rates. In general, it is the middle class and the upper middle class who, due to the parenthesis slippage, are faced with paying the AMT.
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