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Alternative Minimum Tax

From Academic Kids

The Alternative Minimum Tax (AMT) system exists as a parallel income tax system in the United States. The AMT system uses different rules for determining taxable income and allowable deductions, and uses a simple 26/28% rate calculation to determine the Tentative Minimum Tax (TMT). The TMT is compared to the income tax amount calculated for the taxpayer; 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 that the taxpayer is obligated to pay the full amount of the TMT, though some of that tax is considered regular tax and some is considered AMT. The portion of the tax which is considered AMT may be available in later years as a Minimum Tax Credit, reducing the regular income tax due in later years, but only to the taxpayer's TMT level in those later years.

The AMT was introduced in 1970. It targeted very high incomes which were subject to many exemptions under the mainstream tax code of the time.

Critics of the AMT claim that it suffers from two flaws:

  • It is an extremely complicated system of rules, leading to high compliance costs
  • It inexplicably does not correct for inflation, leading to nonsensical effects as time goes by. By 2004, middle-class incomes were starting to become subject to the AMT.
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