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Can somone explain to me this whole Alternative Minium Tax thing?

Answers:1   |   LastAnswerAt:2009.12  

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Aydens Mommy 
Asked at 2009.12.18 23:47:08
i know a little bit about it.. for instance it was put in place many...many years ago and has never been adjusted or updated with salary ranges for the current times.
i also know it has something to do with people making over 50k.
what i don't understand is why i'm getting hit with it this year and not last year when my AGI is pretty much the same? So is my gross income due to increases in health care costs, etc..

also, please don't give me publication numbers. i know i can read about it on irs.gov and have but i'm looking for more of a person to person description.
answer Bostonian In MO  Answered at 2009.12.18 23:47:08
The original intent was to ensure that everyone paid a minimum amount of income tax. Back in the 1960s and early 1970s the Tax Code was actually more convoluted than it is today. Many wealthy taxpayers were actually able to avoid paying any tax at all using perfectly legal means. The AMT sought to pull certain deductions or exemptions for wealthy taxpayers to ensure that they at least paid something.

Technically every taxpayer is supposed to calculate both their "regular" tax and their AMT and then pay the higher of the two. Most seasoned tax pros can tell at a glance if the AMT might kick in and all tax software runs the calculations in parallel and lets you know if the AMT is kicking in.

When first implemented, Congress didn't index it to inflation. The income level that it typically kicked in when first implemented equates to nearly $350,000 today. Congress typically applies a one year "patch" to keep most taxpayers out of AMT territory however due to politics (more on that in a second) some moderate income taxpayers may be "bitten" by it. Large families are at risk, as other taxpayers with unusually high but legitimate itemized deductions. However there's nothing in the law that requires you to itemize so if claiming the Standard Deduction results in less "regular" tax than the AMT does while itemizing, just don't itemize.

Why doesn't Congress fix it permanently? Good question, since they manage to patch it every year! Well, it's all down to politics again and playing "smoke and mirrors" games with the budget. By not fixing it permanently it allows Congress (and the President) to use a large chunk of "phantom revenue" in setting budgetary projections. This lets them show smaller deficits or larger surpluses than will be actually the case once the annual patch is applied.

Until very recently, keeping a handle on the deficit was "job one" when working up the annual budget projections. However given the current state of the economy, that has been tossed out the window on the theory that government spending by running up the deficit massively will do more help by jump starting the economy and create jobs than the cost of borrowing funds to fund the deficit. (Given that real interest rates on Treasury securities has actually sunk into slightly NEGATIVE territory lately, that's probably an accurate assessment.) Since Congress has decided to ignore the deficit until the economy is now back on its feet, now would be an excellent time for them to patch the AMT permanently as there is little political down-side to it at the moment. Cross your fingers, but don't hold your breath!

So, what do YOU do right now? Can't say for sure; would have to examine your tax return to see if there's any way to "smoke and mirror" it legally to avoid the AMT or at least lessen the damage.
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