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The Truth About Alternative Minimum Tax

The Truth About Alternative Minimum Tax

The Alternative Minimum Tax (AMT) is a federal income tax system that was implemented in the United States in 1969. Its purpose was initially to prevent a small number of wealthy taxpayers from exploiting loopholes to avoid paying taxes. However, it has since expanded to affect a much broader range of taxpayers, including those in the middle class. This article will explore the history of the AMT, how it works, and its effects on taxpayers.

History of the AMT

The AMT was introduced as a response to an outcry over wealthy taxpayers using various deductions and loopholes to reduce their taxable incomes dramatically, sometimes even down to zero or negative. In 1969, the Nixon administration proposed the AMT to prevent this from happening. The AMT included a mandatory flat tax on all income over a certain amount and was designed to apply only to a fraction of the wealthiest taxpayers.

From its inception, the AMT proved to be unpopular with high-income earners, and it garnered criticism for its complexity and difficulty in calculation. In response, Congress passed a series of reforms, including increasing the exemption amounts for individuals and adjusting the tax bracket ranges gradually.

However, despite these changes, the AMT’s scope has continued to expand over the years, including changes to the tax code that have since eliminated many of the deductions that had made the AMT seem necessary in the first place. Now, the AMT applies to not only high-income earners but also to many other taxpayers, including those in the middle class.

How the AMT Works

The AMT is a parallel tax system. Taxpayers must calculate their regular income taxes and the AMT and then pay the higher of the two. The AMT achieves this with two major components – an exemption amount and a tax rate.

The exemption amount is a fixed dollar amount that reduces the AMT owed, and it varies based on the taxpayer’s filing status. For instance, in 2021, the exemption amount for single filers is $73,600, while for joint filers, it is $114,600.

The tax rate is 26% of the first $199,900 of alternative minimum taxable income (AMTI) and 28% of AMTI over $199,900.

The AMTI is calculated by adding some back deductions that were subtracted from the taxable income in the regular tax return. The most common deductions that trigger the AMT are:

– State and local taxes
– Property taxes
– Certain miscellaneous itemized deductions

It is important to note that exemptions and deductions can considerably change from year to year, as is the case with most tax laws.

Effects on Taxpayers

The effects of the AMT are notable for high-income earners, but it has increasingly affected taxpayers in the middle class. The AMT reduces the availability of certain deductions, credits, and exemptions, thereby increasing the tax liability on these AMT items.

It is challenging to determine how the AMT affects the average taxpayer comprehensively. However, according to a 2018 report by the Tax Policy Center, the number of taxpayers affected by the AMT increased from 1.1% in 2003 to 4.4% in 2017. The study also found that 71% of taxpayers paying the AMT were in the top 5% of income earners.

The AMT’s impact is expensive on taxpayers, and it may impact important financial decisions such as when to sell assets or when to claim credits to help reduce taxes owed. As a result, many taxpayers must hire professionals to help them navigate the complex requirements of the AMT.

Recent Developments

The Tax Cuts and Jobs Act of 2017 made significant changes that will positively impact the AMT system, including raising the exemption limits.

For 2021, the AMT for single filers begins at an income of $523,600, and the AMT for joint filers begins at an income of $1,047,200. The exemption amounts have also increased, with single filers having an exemption of $73,600 and joint filers having an exemption of $114,600.

It is essential for taxpayers to understand how these changes impact their overall tax situation and whether they should still consider the AMT when making financial planning decisions.


The AMT has come a long way since its inception as a tool to prevent wealthy taxpayers from exploiting deductions to zero-out their tax liabilities. However, with its current impact on a more substantial proportion of taxpayers, it remains a highly contested and controversial aspect of the federal tax code.

While the Tax Cuts and Jobs Act of 2017 made some positive changes to the AMT system, taxpayers must continuously monitor their tax situations to ensure that they understand how the AMT affects their financial plans. In the end, the truth about the AMT is that it is a complex system that can have a considerable impact on taxpayers’ finances, especially on high-income earners.

The alternative minimum tax is imposed at a certain percentage, rather than being calculated according to tax formulas. The alternative minimum tax can be imposed on individuals or corporations, as well as on estates and trusts. The percentage of minimum tax is imposed at different percentage amounts, depending on what is being taxed.

For example, the alternative minimum tax on individuals is higher than the tax imposed on corporations, as a percentage. If the taxes where to be calculated using individual deductions and other formulas, the tax percentage may be greater or lesser, depending on the specific circumstances. In many cases, those filing as single, may see a lesser tax burden when using the alternative minimum tax.

When individuals use the Alternative minimum tax to calculate their tax burden, they would utilize a flat rate for deductions. In other words, the individual would simply take a deduction, pre determined by the government, rather than calculating individual deductions. In some cases, it may be beneficial to calculate deductions individually to lessen the tax burden and in others, it may not be.

The flat percentage rate which can be utilized when using the alternative minimum tax, vary for those filing as single and those filing jointly. In general, the alternative minimum tax is just as beneficial to couples as it is for singles, depending on their combined yearly salary.The rate of alternative minimum tax may also vary for capital gains, but it is generally the same as it is for regular income.