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The Alternative Minimum Tax (AMT) is a feature of the American tax code designed to ensure that high-earning taxpayers pay some minimal amount of income tax, regardless of how many deductions and tax credits they’re able to include on their tax returns. Enacted in 1970, it was Congress’ response to the Treasury Secretary’s assertion that in 1967 legal manipulation of tax deductions and credits had enabled 155 high-income families to pay no income tax at all. Originally designed as a supplemental tax, its prime target was wealthy investors who employed exotic deductions and credits to pay a very low effective tax rate. Its main purpose was to ensure that all taxpayers paid at least their fair share.
When it was modified in 1986, though, subtle changes in the targeted 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 was also transformed into a much more complex parallel tax system. Taxpayers calculate their tax liabilities under both systems, and must pay the higher of the two. The tax brackets of the AMT are periodically changed by Congress; in 2010, for example, the rate was 26% of all income up to $175,000 US Dollars (USD) and 28% of everything above, regardless of filing status. The personal deduction was $47,450 USD for single taxpayers and $72,450 USD for married couples filing jointly.
Before the 1984 tax code overhaul that indexed the "regular" tax brackets to inflation, many Americans complained about the problem of “bracket creep,” an issue that surfaces regularly in discussions of the AMT. It was said at the time that inflation was a hidden tax because the pay 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 on what essentially was the same income. Despite having indexed the standard tax code to inflation two years earlier, though, when Congress reformulated the AMT in 1986, it did so without indexation. Even with the periodic changes Congress makes in the AMT’s tax brackets, more American taxpayers annually become subject to the AMT.
Without completing the worksheet every year, it’s difficult to predict if a taxpayer will be subject to the AMT, and tax strategies to avoid having to pay it can be complex and confusing. Lower-income taxpayers aren’t affected by it, and those taxpayers with the highest incomes usually aren’t effected either, because they’re paying higher effective tax rates. It’s generally the middle class and upper middle class who, due to bracket creep, find themselves faced with paying the AMT.
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