Alternative Minimum Tax

Added on 5/2/05

The Alternative Minimum Tax (AMT) was put into the tax code in the late 1960’s to make sure that “wealthy” individuals paid some tax.  Basically, above certain income levels ($35,000 for single & $45,000 for married couples), most deductions and credits are not allowed and the income is taxed at 26% (28% for couples with gross incomes over $175,000 and single people earning more than $87,500).  If the AMT is larger than the regular tax, then the taxpayer (you) pays the higher tax.

When it was first introduced the tax was designed to make a small number of individuals with gross incomes over $200,000 that were paying no taxes because of their legitimate deductions pay some tax.  While the regular tax was adjusted (indexed) for inflation beginning in the 1980’s, the AMT was never adjusted for inflation.  $200,000 in 1967 is equivalent to about $1,000,000 today.  Not only has the AMT not been indexed, the percentage of the tax has been increased from an initial amount of 20% to the current 26% & 28% values, plus the $35,000 and $45,000 deduction amounts are eliminated (phased out) for incomes above $112,500 for single persons and $150,000 for married couples.

The basic deduction amount has been increased to $58,000 for married couples and $40,250 for single persons, but in 2006 the deduction reverts back to $35,000 single and $45,000 married.  In 2003 over 2,000,000 taxpayers paid some AMT.  In 2004 it is estimated that about 4,000,000 will pay some AMT and by 2009 over 12,000,000 will pay some AMT.  Eventually, since the AMT is not indexed to inflation, everyone will be paying the AMT, effectively canceling all of the deductions that are in the current tax code.

An example of a “wealthy couple” that will be hit by the AMT: 

Mary & John have 6 children and they earned a combined income of $100,000 in 2004.  Under the regular tax they got a standard deduction of $9,700 and a dependency allowance of $24,800 (8 x $3,100). Their taxable income was $66,500 and their 2004 tax was $10,125. 

The AMT tax, however is calculated as follows:

            Gross Income                           $100,000

            Less AMT deduction                    58,000

            Taxable Income                        $  42,000

            Tax @ 26%                             $  10,920

Since the AMT is $795 higher than the regular tax Mary & John paid the higher tax.  In 2005, if their income remains the same as 2004, their regular tax will drop by $150, but their AMT will remain the same.  In that case inflation has taken a larger bite out of their income, but they will the same amount in taxes.

Mary & John are not “wealthy”, they are hard working middle class, yet the tax code treats them as wealthy people.  The AMT hasn’t been corrected because congressmen and senators are addicted to spending too much of our hard earned money buying our votes to keep their high paying cushy jobs.  They have used the “Class Warfare” technique to get the majority of the people to go along with this terrible tax. 

If you are one of these “wealthy” people be prepared to pay more taxes.  If you do not like paying more taxes, begin telling your congressman and senators how you feel.