AMT for personal income tax

Alternative Minimum Tax (AMT) is part of the federal income tax system. There are AMTs for both personal income tax and corporate income tax. The focus here is the AMT for personal income tax, which has received increased attention in recent years.

The regular way of federal tax calculation allows for many "tax preference items" to reduce personal tax liabilities. These items include long-term capital gains, accelerated depreciation, certain medical expenses, percentage depletion, certain tax-exempt income, certain credits, personal exemptions and the standard deduction. It has been long noted that people with extremely higher income get disproportional benefits to evade tax burden because they have more access to these "loopholes." The alternative minimum tax (AMT) was thus created by the Tax Reform Act of 1969 to ensure that anyone who benefits from these tax advantages pays at least a minimum amount of tax. (For more details of AMT calculation, see here.)

When the AMT first became effective, it was intended to target [only!] 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. However, as it was not indexed to inflation and recent tax cuts, an increasing number of upper-middle-income taxpayers have been finding themselves subject to this tax. According to a brief issued by the Congressional Budget Office (CBO) (No. 4, April 15, 2004), "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." (Curious abou how you may avoid the AMT? Click here.)

In recent years, pressure to reduce or eliminate the tax is growing as an increasing number of taxpayers incur the AMT. Yet no formal approach has been taken to repeal the tax code. For years, Congress has passed one-year patches aimed at minimizing the impact of the tax. The future of AMT remains unclear, as policy analysts are divided over the best way to address the criticisms.