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Encyclopedia > Alternative Minimum Tax
Taxation in the United States

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Federal taxation
Internal Revenue Service
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Income tax  ·  Payroll tax
Alternative Minimum Tax
Estate tax  ·  Excise tax
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Capital gains tax
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Alternative Minimum Tax (AMT) is a tax system that is part of the federal income tax system in the United States. There are two AMTs, one for individuals and one for corporations; the AMT for individuals is described here. Taxation in the United States is a complex system which may involve payment to at least four different levels of government. ... Seal of the Internal Revenue Service The Internal Revenue Service (IRS) is the United States federal government agency that collects taxes and enforces the internal revenue laws. ... Seal of the Internal Revenue Service Tax forms in the United States are used by taxpayers and tax-exempt organizations to report financial information to the Internal Revenue Service (IRS). ... The United States imposes an income tax on the taxable income of individuals, corporations, trusts, decedents estates and certain bankruptcy estates. ... The Federal Insurance Contributions Act (FICA) tax, a kind of payroll tax, is a United States employment tax imposed in an equal amount on employees and employers to fund federal programs for retirees, the disabled, and children of deceased workers. ...        The estate tax in the United States is a tax imposed on the transfer of the taxable estate of a deceased person, whether such property is transferred via a will or according to the state laws of intestacy. ...        Look up Excise tax in the United States in Wiktionary, the free dictionary. ... Inheritance tax, also known in some countries outside the United States as a death duty and referred to as an estate tax within the U.S, is a form of tax levied upon the bequest that a person may make in their will to a living person or organisation. ...        Corporate tax in the United States is a tax on the taxable income of a C corporation or an entity taxed as a C corporation. ... A capital gains tax (abbreviated: CGT) is a tax charged on capital gains, the profit realized on the sale of an asset that was purchased at a lower price. ... Taxation in the United States is a complex system which may involve payment to at least four different levels of government. ... State income tax is an income tax in the United States that is levied by each individual state. ... A sales tax is a tax on consumption and is normally a certain percentage that is added onto the price of a good or service that is purchased. ... A use tax is a type of excise tax levied in the United States. ... State tax levels indicate both the tax burden and the services a state can afford to provide residents. ... Property tax, millage tax is an ad valorem tax that an owner of real estate or other property pays on the value of the property being taxed. ... Tax reform is the process of changing the way taxes are collected or managed by the government. ... The FairTax Book, co-authored by Neal Boortz and John Linder, was published on August 2, 2005, as a tool to increase public support for the FairTax Plan. ... A flat tax, also called a proportional tax, is a system that taxes all entities in a class (typically either citizens or corporations) at the same rate (as a proportion on income), as opposed to a graduated, or progressive, scheme. ... Tax protester arguments are a number of heterodox theories that deny that a person has a legal obligation to pay a tax for which the government has determined that person is liable. ... Tax protesters in the United States make a number of statutory arguments that the assessment of the income tax in the United States violates the statutes enacted by the United States Congress and signed into law by the President. ... Tax protester conspiracy arguments are arguments raised by tax protesters that assert that the imposition of the income tax in the United States is the result of some kind of illicit conspiracy. ... Image File history File links This is a lossless scalable vector image. ... Image File history File links Flag_of_Canada. ... Image File history File links Flag_of_France. ... Image File history File links Flag_of_Germany. ... Image File history File links Flag_of_Hong_Kong. ... Image File history File links Flag_of_India. ... Image File history File links Flag_of_Indonesia_(bordered). ... Image File history File links Flag_of_New_Zealand. ... Image File history File links Flag_of_Ireland. ... Image File history File links Flag_of_Russia_(bordered). ... Image File history File links Flag_of_Singapore_(bordered). ... Image File history File links Flag_of_the_United_Kingdom. ... Image File history File links No higher resolution available. ... Image File history File links European_flag. ... An income tax is a tax levied on the financial income of persons, corporations, or other legal entities. ...


The AMT is imposed under 26 U.S.C. § 55 and disallows many deductions and exemptions allowable in computing "regular" tax liability. (Regular tax liability is defined in 26 U.S.C. § 55(c)(1), with reference to 26 U.S.C. § 26(b), and does not include AMT and various other categories of taxes imposed under Chapter 1 of Subtitle A of the Internal Revenue Code.) The AMT sets a minimum tax rate of either 26% or 28% (depending on the amount of the taxpayer's "alternative minimum taxable income," as adjusted) on some taxpayers so that they cannot use certain types of deductions to lower their tax. By contrast, the rate for a corporation is 20%. Affected taxpayers are those who have what are known as "tax preference items". These include long-term capital gains, accelerated depreciation, certain medical expenses, percentage depletion, certain tax-exempt income, certain credits, personal exemptions, and the standard deduction. The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes... The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes... The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes... The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes... A capital gains tax (abbreviated: CGT) is a tax charged on capital gains, the profit realized on the sale of an asset that was purchased at a lower price. ... Declining-balance depreciation of a $50,000 asset with $6,500 salvage value over 20 years. ... This article or section does not cite its references or sources. ... Within the Australian, Canadian, United Kingdom, and United States tax systems, a tax credit is an item which is treated as a payment already made towards taxes owed. ... A deduction for a Personal Exemption amount for the individual taxpayer, the taxpayers spouse, and the taxpayers child or other dependent for purposes of calculating a U.S. taxpayers federal income tax is provided in the Internal Revenue Code at 26 U.S.C. Â§ 151. ... Individual taxpayers in the United States are faced with a choice when preparing their tax returns. ...


The AMT was introduced by the Tax Reform Act of 1969,[1] and became operative in 1970. It was intended to target 155 high-income households that had been eligible for so many tax benefits that they owed little or no income tax under the tax code of the time.[2] The United States Tax Reform Act of 1969 established individual and corporate minimum taxes, established a new tax schedule for single taxpayers, and lowered the maximum rate on earned income from 70 percent to 50 percent. ...


In recent years, the AMT has been under increased attention. Because the AMT is not indexed to inflation and recent tax cuts,[3][4] an increasing number of middle-income taxpayers have been finding themselves subject to this tax.


In 2006, the IRS's National Taxpayer Advocate's report highlighted the AMT as the single most serious problem with the tax code. The advocate noted that the AMT punishes taxpayers for having children or living in a high-tax state, and that the complexity of the AMT leads most taxpayers who owe AMT not realizing it until preparing their returns or being notified by the IRS. [6]


A brief issued by the Congressional Budget Office (CBO) (No. 4, April 15, 2004),[5] concludes: The Congressional Budget Office is a federal agency within the legislative branch of the United States government. ...

Over the coming decade, a growing number of taxpayers will become liable for the AMT. In 2010, if nothing is changed, one in five taxpayers will have AMT liability and nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax. Rather than affecting only high-income taxpayers who would otherwise pay no tax, the AMT has extended its reach to many upper-middle-income households. As an increasing number of taxpayers incur the AMT, pressures to reduce or eliminate the tax are likely to grow.

However, CBO's rules[6] state that it must use current law in its analysis and at the time of the above text was written, the AMT threshold was set to expire in 2006 and be reset to far lower values.[7]

Contents

Structure

Example of level of AMT (in absolute and relative terms on top and bottom) in 2000 and 2004 (orange and blue respectively) for a married couple who are filing jointly. The dashed line on the top show the narrow margin between the AMT and current 2004 tax rate, which means that not many deductions are needed before the AMT must be paid.
Example of level of AMT (in absolute and relative terms on top and bottom) in 2000 and 2004 (orange and blue respectively) for a married couple who are filing jointly. The dashed line on the top show the narrow margin between the AMT and current 2004 tax rate, which means that not many deductions are needed before the AMT must be paid.

In addition to the normal tax code calculations, the AMT system uses a different set of rules for determining taxable income and allowable deductions, and uses 26/28% rate calculation to determine the "Tentative Minimum Tax" (TMT). The TMT is compared to the income-tax amount calculated for the taxpayer. Image File history File links Size of this preview: 600 × 600 pixel Image in higher resolution (1800 × 1800 pixel, file size: 40 KB, MIME type: image/png) The above figure shows the AMT as a function of AGI and compares it to the tax on wages only without any deduction... Image File history File links Size of this preview: 600 × 600 pixel Image in higher resolution (1800 × 1800 pixel, file size: 40 KB, MIME type: image/png) The above figure shows the AMT as a function of AGI and compares it to the tax on wages only without any deduction...


If the regular income-tax amount is greater than the TMT, no special action is required.


If the TMT is greater than the tax calculated using the regular rules, the difference between the TMT and the regular tax is added to the regular tax amount, so the taxpayer pays the full amount of the TMT (although some of that tax is considered regular tax and some is considered AMT).


The portion of the tax that is considered AMT may be available in later years as a "Minimum Tax Credit", reducing the regular income tax due in later years, but not below the taxpayer's TMT level in those later years.


Criticisms

Critics of the AMT argue that it suffers from various flaws:

  • AMT treats income from “specified private activity" municipal bonds (MUNIs) as taxable for AMT calculations except for "Gulf Opportunity Zone bonds" described in section 1400N(a). The AMT thus indirectly raises the financing cost to local governments, because investors will demand high yields on those bonds.
  • AMT removes deductibility of state and local taxes, creating double taxation for some taxpayers.
  • The AMT is not indexed with inflation, which leads to a lower real income threshold, burdening an increasing number of taxpayers with the AMT as time goes by.
    • The Congressional Budget Office estimates that in 2006 34.6% of taxpayers in the $50,000 to $100,000 AGI range will owe AMT.[8], and 11 percent of all tax payers will owe the AMT.
    • The IRS estimates that by 2010, 34% of all individual filers who pay income tax will be subject to the AMT.
  • Determining whether one is subject to the AMT is complex. According to the IRS, some people cannot determine whether they owe AMT taxes without: [7]
    • Completing a 16 line worksheet.
    • Reading 9 pages of instructions.
    • Completing a 55 line form.
  • AMT is not a tax on multiple year capital gains, but a tax on within-year capital gains only.

For example, if the taxpayer has a prior year loss carry forward from stock trades, he or she cannot deduct them for purposes of determining the AMT. By contrast, the regular tax calculation allows the taxpayer to offset prior year losses with current year gains, which would allow long-run profit accounting. In the United States, a municipal bond (or muni) is a bond issued by a state, city or other local government, or their agencies. ... Double taxation is a situation in which two or more taxes may need to be paid for the same asset, financial transaction and/or income and arises due to overlap between different countries tax laws and jurisdictions. ... Nominal value is the value of anything expressed in money of the day, versus real value which removes the effect of inflation. ...

  • AMT causes market distortion in capital markets. For example, if an asset (stock or bond) holder would pay less in taxes than they would lose in value if they were to hold a losing stock until they can balance the sale of the money-losing stock with the sale of a money-making stock during the same tax year. This leads to inefficiency in the asset markets that leads to inefficient distribution of capital among companies.[citation needed]
  • Like all taxes on investment, the AMT can reduce investment in companies by increasing the capital gains tax.[citation needed] This, in turn, can reduce job creation. This may be offset, if not entirely, because in a country with a debt, all taxes also increase private sector investment by decreasing the amount of invested money tied up in bonds.[citation needed]

A market distortion is a specific type of market failure brought about by deliberate government regulation which prevents economic agents from freely establishing a clearing price. ...

Arguments against repealing the AMT

While many parties agree that the AMT needs to be changed, some argue against its outright repeal. The Center on Budget and Policy Priorities state the cost of repeal is prohibitive, with a loss of between $800 billion and $1.5 trillion in federal revenues over 10 years.[9] In addition, the Tax Policy Center claims that repeal of the AMT would be more expensive than repeal of the income tax.[10] The Center on Budget and Policy Priorities (CBPP) describes itself as a policy organization . ...


Recent attention

After the stock revaluations of year 2000 to year 2002, the San Jose Mercury News and San Francisco Chronicle ran a series of newspaper articles about people who were surprised to have to pay the AMT. Featured were employees who had stock options and exercised those options. By the time the employees sold the stock, the stock had dropped by 80% to 100%. One woman was worried about the IRS foreclosing on her home. Another engineer who worked at Rambus, Inc. had exercised his stock options near $400 per share but actually sold the shares at less than his purchase price. He wound up owing the IRS more than a million dollars and committed suicide.[11] The Dot-com bubble refers to approximately four years of time (1997 - 2001) in which stock markets in Western nations had their value increase rapidly, most significantly in the technology and new Internet sector. ... The Mercs sections vary by day of the week, but Business, Sports, and The Valley are standard daily fare. ... Todays San Francisco Chronicle was founded in 1865 as The Daily Dramatic Chronicle by teenage brothers Charles de Young and Michael H. de Young. ... A stock option is a specific type of option with a stock as the underlying instrument (the security that the value of the option is based on). ... This article is about the company. ... Suicide (Latin sui caedere, to kill oneself) is the act of intentionally taking ones own life. ...


Complexity and unintended consequences

The AMT is similar to a flat tax of about 28% on adjusted gross income over $175,000 plus 26% of amounts less than $175,000 minus an exemption depending on filing status after adding back in most deductions. However, taxpayers must also perform all of the paperwork for a regular tax return and then all of the paperwork for Form 6251. Furthermore, affected taxpayers must file AMT versions of all carryforwards since the AMT carryforwards will be different than regular tax carryforwards. Once a taxpayer qualifies for AMT, she must file AMT versions of carryforward losses and AMT carryforward credits until they are used up in future years. The definitions of taxable income, deductible expenses, and exemptions differ on Form 6251 from those on Form 1040. A flat tax, also called a proportional tax, is a system that taxes all entities in a class (typically either citizens or corporations) at the same rate (as a proportion on income), as opposed to a graduated, or progressive, scheme. ...


Taxpayer incomes

The AMT's failure to index for inflation is widely conceded as a flaw across the political spectrum. In 2005, the Urban-Brookings Tax Policy Center and the Treasury Department estimated that around 15% of households with incomes between $75,000 and $100,000 must pay the AMT, up from only 2-3% in 2000, with the percentage increasing at high incomes. That percentage is set to increase quickly over the coming years if no change is made such as indexing for inflation. Currently, households with incomes below $75,000 are subject to the AMT only very rarely (and thus most tax advisors do not recommend computing AMT for such households). That is set to change in only a few years, however, if the AMT remains unindexed. The United States Department of the Treasury is a Cabinet department, a treasury, of the United States government established by an Act of U.S. Congress in 1789 to manage the revenue of the United States government. ...


The median household income in the United States was $44,389 in 2005, and households making over $75,000 per year made up the top quartile of household incomes. Because those are the households generally required to compute the AMT (though only a fraction currently have to pay), some argue that the AMT still hits only the wealthy or the upper middle class. However, some counties, such as Fairfax County, VA ($88,133), and some cities, such as San Jose, CA ($71,765), have local median incomes that are considerably higher than the national median, and approach or exceed the typical AMT threshold. The cost-of-living index is generally higher in such areas, which leads to families who are "middle class" in that area having to pay the AMT, while in poorer locales with lower costs of living, only the "locally wealthy" pay the AMT. In other words, many who pay the AMT have incomes that would place them among the wealthy when considering the United States as a whole, but who think of themselves as "middle class" because they are not wealthy due to the cost of living in their locale. In probability theory and statistics, a median is a number dividing the higher half of a sample, a population, or a probability distribution from the lower half. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... In descriptive statistics, a quartile is any of the three values which divide the sorted data set into four equal parts, so that each part represents 1/4th of the sample or population. ... Fairfax County is a county located in the Commonwealth of Virginia. ... City nickname: Capital of Silicon Valley County Santa Clara County, California Area  - Total  - Water 461. ... A cost-of-living index measures the cost of goods and services, typically over time. ...


The burden of computing the AMT and the disallowance of deductions for state and local income taxes magnify criticisms of the AMT. The deduction for state and local taxes in the normal income tax code can encourage wealthy areas to raise taxes and, in effect, redirect monies that would normally go to the federal government (and hence to residents of poorer states) to their state and local governments, where it can be spent on their own citizens. The AMT would remove this theoretical incentive for wealthy states to increase their state and local taxes, and makes it more likely that citizens of areas with high costs of living will subsidize citizens of areas with lower costs of living.


More and more individual taxpayers are falling into what is being called the "AMT" trap. For many taxpayers, the common question is, "How do I avoid AMT"? The simple answer is to have fewer tax preference deductions on the taxpayer's Schedule A. The biggest tax preference items on Schedule A are state income taxes and local real estate taxes. In any given year, if a taxpayer's Alternative Minimum Taxable Income (AMTI) is greater than his or her Regular Taxable Income, the taxpayer may want to push the last real estate tax payment and state estimated taxes into the upcoming year.


Notes

  1. ^ Pub. L. No. 91-172, 83 Stat. 487 (Dec. 30, 1969).
  2. ^ [1]
  3. ^ [2]
  4. ^ http://www.washingtonpost.com/wp-dyn/articles/A36988-2004Mar6.html
  5. ^ http://www.cbo.gov/showdoc.cfm?index=5386&sequence=0
  6. ^ [3]
  7. ^ [4]
  8. ^ http://opencrs.cdt.org/rpts/RS22200_20050719.pdf
  9. ^ Myths and Realities about the Alternative Minimum Tax, by Aviva Aron-Dine, Center on Budget and Policy Priorities, February 14, 2007
  10. ^ [5]
  11. ^ http://www.accessmylibrary.com/coms2/summary_0286-5970657_ITM

  Results from FactBites:
 
Alternative Minimum Tax - Wikipedia, the free encyclopedia (1530 words)
The AMT affects taxpayers who have what are known as "tax preference items." These include (among others) long term capital gains, accelerated depreciation, percentage depletion, and certain tax-exempt income, which are all considered to have favorable tax treatment and could trigger the alternative minimum tax.
The deduction for state and local taxes in the normal income tax code can encourage wealthy areas to raise taxes and, in effect, redirect monies that would normally go to the federal government (and hence to residents of poorer states) to their state and local governments, where it can be spent on their own citizens.
Thus, many Democrats favor a tax reform of the AMT that would benefit primarily those who would be objectively viewed as wealthy by the standard of the country as a whole or their incomes, although they only live what they, themselves, like to call "a middle class lifestyle".
Tax Topics - Topic 556 Alternative Minimum Tax (282 words)
The alternative minimum tax is a separately figured tax that eliminates many deductions and credits, thus increasing tax liability for an individual who would otherwise pay less tax.
You may have to pay the alternative minimum tax if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the exemption amount.
If you are not liable for alternative minimum tax this year but you paid alternative minimum tax in one or more previous years, you may be eligible to take a special minimum tax credit against your regular tax this year.
  More results at FactBites »

 
 

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