Alternative Minimum Tax (AMT)
The AMT is a mind boggling tax that applies to the exclusions, deductions, and credits you claimed on your regular income tax return. You calculate both your regular and alternative tax liabilities and pay the higher amount.
The original stated objective of the AMT was to ensure fairness. Lawmakers thought it was “inherently unfair for high income taxpayers to pay little or no tax due to their ability to utilize tax preferences.” By “tax preferences,” lawmakers meant the exclusions, deductions, and credits that are specifically written into the tax code.1 Hence, under the AMT, you are denied certain tax benefits and other tax benefits are reduced.
Regardless of the merit (or lack of merit) of the AMT as originally designed, it has been apparent for many years that the AMT hits millions of taxpayers that were not originally in its sights. This happens for several reasons, including inflation.2
1 Staff of the Joint Committee on Taxation, “General Explanation of the Tax Reform Act of 1986,” JCS-10-87 (May 4, 1987), pages 432-33.
2 Staff of the Joint Committee on Taxation, “Study of the Overall State of the Federal Tax System and Recommendations for Simplification Pursuant to Section 8022(3)(B) of the Internal Revenue Code of 1986, Volume II: Recommendations of the Staff of the Joint Committee on Taxation to Simplify the Federal Tax System,” JCS-3-01 (April 2001), pages 13-14.