What is the Alternative Minimum Tax and Why Should You Be Worried?

by Justin Weinger on March 26, 2007

With April 15th (okay, this year your taxes are due April 17th) right around the corner, it’s time to go ahead and take a look at a relatively obscure tax law that could ultimately force you to pay a lot of money to good old Uncle Sam.

The Alternative Minimum Tax (AMT) was introduced in the Tax Reform Act of 1969 and was set up essentially to make sure that all tax payers were required to pay something to the Federal Government.  Essentially, the AMT sets a tax rate of roughly 25% on certain tax payers and reduces the amount of deductions they can take.

According to Wikipedia:

“The AMT affects tax payers who have what are known as ‘tax preference items.’  These items include, among other things, long-term capital gains, accelerated depreciation, certain medical expenses, percentage depletion, certain tax-exempt income, certain credits, personal exemptions and the standard deduction.”

While in theory the AMT is a relatively good idea, in practice it’s causing a lot of people a lot of angst.  The reason being the AMT was not indexed to adjust with inflation, meaning as wages increase the more and more people are subject to the AMT.

When the AMT was set up, it mostly affected people in the upper class because people in these tax brackets were able to take advantage of many of the deductions mentioned above in order to reduce the amount of money they might otherwise owe to the IRS.  However, as income has increased more and more middle class people are getting hit and end up owing money to the IRS when they were expecting to get a refund.

According to the Congressional Budget Office, currently 11% of all tax payers will owe the AMT, while the IRS predicts that by 2010 over one out of every three tax payers will be subject to the AMT.

So, to make a long story short, if you have a bunch of these “tax preference items” and have a household income above $75,000 – you might be paying a lot more in taxes than what you had previously thought. 

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