The Alternative Minimum Tax (AMT) is a mechanism in the tax code that was introduced back in 1969 to ensure that high-income earners did not escape taxes by taking advantage of deductions and credits. The AMT requires taxpayers to calculate their tax liability twice: once under regular income tax rules and again under the alternative minimum tax rules, with the taxpayer paying whichever amount is higher.
The AMT essentially creates a parallel tax system with its own set of rules for calculating taxable income, exemptions, and deductions. This can make it difficult for taxpayers to understand how the AMT affects them, which has led to confusion and frustration among many taxpayers.
One of the main criticisms of the AMT is that it was originally designed to target only high-income earners but now affects many middle-class families. The reason for this is that over time, inflation has increased incomes without adjusting for inflation could trigger the AMT.
The exemption amounts for determining whether someone falls within the scope of AMT have not been adjusted frequently enough in order to keep pace with inflation. As a result, more people are being pulled into the world of alternative minimum taxes.
Today, millions of Americans find themselves caught up in this complicated web known as alternative minimum taxes. In fact, according to recent estimates from Congress’ Joint Committee on Taxation (JCT), about 5 million taxpayers will be subject to the alternative minimum tax in 2020.
So what can you do if you’re one of those affected?
Firstly it’s important you understand how it works; otherwise, you’ll never know if or when it applies to your situation. Here’s an overview:
Under normal circumstances when doing our taxes we first add up all our income sources from salary or wages paid by employers who withhold federal income taxes from each paycheck then adding any interest earned on savings accounts or investment accounts along with other forms like rental property and business profits etcetera.
Next step involves taking deductions, which are basically tax breaks that you’re allowed to take for certain expenses that you’ve incurred during the year. These deductions can be for things like mortgage interest and property taxes on your home, charitable donations or medical expenses.
The final step is calculating how much income tax you owe by multiplying your taxable income with a rate determined by the IRS’s tax tables based on filing status (single, married filing jointly, etc.) and total income.
With AMT however there are additional steps involved:
1) Calculate your regular taxable income first as outlined above.
2) Add back any adjustments that were made in order to get to adjusted gross income (AGI).
3) Subtract the applicable AMT exemption amount from this number.
4) Multiply that result by 26 percent if under $194,800 and 28 percent if over $194,800.
If the result of these calculations is higher than what you would ordinarily pay in federal taxes then you will have to pay more under AMT rules instead.
So what can taxpayers do about it?
One possibility is adjusting their withholding amounts to ensure they don’t owe too much when it comes time to file their return. Another option might be making sure they take full advantage of all available deductions and credits so as not to trigger an AMT liability unnecessarily.
There are also some longer-term strategies taxpayers could consider such as investing in municipal bonds or contributing towards retirement accounts like IRAs or 401ks which could help reduce their overall taxable incomes and therefore make them less susceptible to being subject alternative minimum taxes
In conclusion, alternative minimum taxes remain one of those areas within the US tax code where complexity reigns supreme. And while most people may never need worry about whether or not they’ll ever find themselves caught up in its web; understanding how it works should at least give them some peace of mind knowing what potential pitfalls lie ahead so long as we continue having inflation without corresponding adjustment of exemption amounts.