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What is Alternative Minimum Tax (AMT)?

The Alternative Minimum Tax (AMT) is a tax mechanism developed by the I.R.S. in 1969 to prevent the wealthiest taxpayers (corporations included), from using large deductions and loopholes to avoid paying their fair share of taxes.

AMT is calculated at the same time as regular income tax, and as a taxpayer, you are asked to pay the greater of the two. Initially, only the “one percent” was targeted to pay AMT, and in 1970 that tallied under 20,000 taxpayers. However, it was not automatically indexed for inflation, and over the years more and more middle-class taxpayers were subjected to paying AMT.  In 2011, according to the Tax Policy Center, only 53% of households with annual earnings of $200,000-500,000 paid the AMT and only 33.5% of those earning $1,000,000 upwards paid AMT. However, in 2012, over 4 million American taxpayers with incomes between $150,000 – 200,000 were affected.

AMT is typically imposed at a flat rate, on an adjusted amount of taxable income above a certain threshold or exemption. This exemption is significantly higher ?Lower ? than that applied to regular income tax.  AMT increases the amount of income taxed by disallowing many deductions and adding line items that would typically be tax-free with regular income tax filing. These would include depreciation, medical expenses, state  tax, and miscellaneous itemized deductions. For detailed information on how specific items are computed for AMT visit the IRS website at www.irs.gov.

As a part of the infamous “fiscal cliff” deal in January 2013, President Obama signed the American Taxpayer Relief Act of 2012 which indexes to inflation the income thresholds subject to AMT. To determine whether you owe any additional tax under the Alternative Minimum Tax system, you need to fill out Form 6251 and seek advice from your financial and tax advisors.

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