Impact of the Alternative Minimum Tax

The alternative minimum tax is important to tax payers, and is a controversial tax system because of its unexpected impact. How does the alternative minimum tax affect you?

The alternative minimum tax is bad news for middle-class tax payers.
The alternative minimum tax (AMT) is bad news for tax payers who aren't filthy rich. While the AMT was designed to catch high-net-worth individuals who don't pay enough income tax, the system hasn't been significantly restructured in the 40 years since its inception. It isn't tied to inflation.

This means that a system once designed to ensure the wealthy paid enough taxes is now penalizing regular people who have worked hard to increase their earnings and who have made investments to consolidate their financial position. If you make more than $75,000 with many deductions and exemptions, or more than $100,000 with even a few exemptions, you may be subject to the alternative minimum tax.

The alternative minimum tax explained.
The alternative minimum tax is basically a second tax system under which many of the traditional deductions and exemptions aren't allowed. While its initial purpose was to target people who didn't pay any income tax, it now affects many individuals who don't participate in any special tax activity. The system is basically an entirely different tax code with its own rules and tax rates, and tax payers should consult a tax planner if they suspect they may qualify for the alternative minimum tax.

Under the alternative minimum tax, most tax payers pay more.
Basically, if you find that you're subject to the alternative minimum tax, you're virtually guaranteed to be paying more in taxes. The AMT phases out many exemptions and deductions that apply under standard tax code, inflating your income tax numbers and therefore your tax liability. You may find that you owe thousands of dollars more under the AMT, without any significant investment or special tax activity.

Inflation and the alternative minimum tax.
The AMT was established in 1969. Unlike other tax codes, the AMT isn't tied to inflation, and doesn't make allowances for tax cuts since its inception. This means that a system designed to force the wealthy to pay taxes is now affecting upper-middle-class individuals who have high earnings.

Without being indexed to inflation, the AMT is subject to bracket creep, meaning that people who would normally be in a different tax bracket may find themselves in the AMT bracket through no fault of their own or change in their activities.

Consult a financial planner to avoid AMT.
Certain investment types make you more likely to be subject to the alternative minimum tax. If you think you may fall under the AMT, consult a tax planning professional to help you minimize your liability. You may be forced to pay taxes under the alternative minimum tax while you restructure your income and investments, but a tax planner can help you minimize your taxes in the future and plan for dealing with the alternative minimum tax.