Saturday, December 18, 2010



"The alternative minimum tax, or AMT, is a separate system of income taxation that operates in parallel to the regular income tax. There are two AMTs, one for individuals and the other for corporations."

"This controversial tax was enacted as part of the Tax Reform Act of 1969 to target the rich. But because the rates were not adjusted for inflation, it now targets not only the rich but also the middle class."

Congress enacted the minimum tax following testimony by the Secretary of the Treasury that 155 people with adjusted gross income above $200,000 had paid no federal income tax on their 1967 tax returns.9 Adjusted for inflation, $200,000 in 1966 dollars equals about $1.1 million in today's dollars.

In 1990, about 132,000 individuals paid the AMT.

"By 2010, nearly 30 million taxpayers will be hit -- among them, a staggering 94 percent of married filers who have children and make $75,000 to $100,000." The Alternative Minimum Tax was designed as a parallel tax system to the federal income tax and checks it to ensure that that "the rich" pay some tax."

"The AMT was supposed to prevent individuals with very high incomes from using special tax credits and deductions to pay little or no tax. It was not intended to become a major source of revenue for the federal government, but simply a fix to a loophole in the income tax code. But for various reasons the AMT impacts more people every year."

"With the AMT most tax deductions are disallowed. In 1969 the minimum tax was a 10 percent flat rate. Over the years the AMT has evolved to also include a corporate AMT. With each tax reform effort from the Carter to Clinton Administration the AMT has increased. As of the latest revision, which was passed in 1993, there is a two tier system: 26 percent and 28 percent for individuals."

The rate at which the AMT captures more taxpayers is increasing more than the tax revenue it generates for the government. This is an indication that the tax is capturing people at lower and lower income levels, which was not the original intent of the tax.

"The AMT was originally devised to reduce certain deductions used frequently by high-income taxpayers and infrequently by other taxpayers. Hence the AMT has provisions concerning deductions for drilling oil wells, farm tax shelters, interest from tax-exempt "private activity bonds," and other things unfamiliar to the average taxpayer."

The AMT is not an "income tax". The way the AMT net "catches" taxpayers is not by income measures alone, but also by the kinds of deductions the taxpayer claims. For example, the AMT applies to everyone who claims a deduction for stock options not exercised in the same year they were received. Such taxpayers go straight to the AMT system and out of the federal income tax system. Other taxpayers may be subject to the AMT if their taxable income plus certain other items exceeds a base amount for individuals and married couples.

"Many, even those in the IRS, recognize that the AMT produces anomalous outcomes, policy distortions, and others problems. The revenue that the AMT generates is also rising, though not as fast as the number of AMT taxpayers.
• Failure to Index AMT Exemptions for Inflation"
• Disproportionate Impact on High-Tax State Residents (The three highest-ranking states in terms of AMT filers are CA, NY and NJ)
• Impact on “Wrong” Taxpayers
• Complexity
• Adverse Impact on Large Families
• Adverse Impact on Married Couples
• Unpredictability of Estimated Tax Payments"


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