Alternative minimum tax

[1][2] An alternative minimum taxable income (AMTI) is calculated by taking the ordinary income and adding disallowed items and credits such as state and local tax deductions, interest on private-activity municipal bonds, the bargain element of incentive stock options, foreign tax credits, and home equity loan interest deductions.

Due to inflation and cuts in ordinary tax rates, a larger number of taxpayers began to pay the AMT.

[9] The alternative minimum taxable income (AMTI) is calculated by taking the taxpayer's regular income and adding on disallowed credits and deductions such as the bargain element from incentive stock options, state and local tax deduction, foreign tax credits, and passive activity losses.

She also exercised and held (did not sell) 800 incentive stock options (ISOs) each for her employer, with a strike price of $100 and a current fair market value of $200.

Treasury Secretary Joseph Barr prompted the enactment action with an announcement that 155 high-income households had not paid a dime of federal income taxes.

On the other hand, individuals or corporations which received the bulk of their income from such sources as capital gains or were in a position to benefit from net lease arrangements, from accelerated depreciation on real estate, from percentage depletion, or from other tax-preferred activities tended to pay relatively low rates of tax.

The most significant of those, according to the Joint Committee on Taxation, occurred under the Reagan era Tax Equity and Fiscal Responsibility Act of 1982.

[31] Further significant changes occurred as a result of the Omnibus Budget Reconciliation Acts of 1990 and 1993, which raised the AMT rate to 24% from the prior level of 21% and then to 26% and 28% for individual filers with incomes that exceeded $175,000.

[32] Now, some taxpayers who do not have very high incomes or participate in numerous special tax benefits and/or activities will pay the AMT.

[34] The tax rate and exemption increases are reflected in the following table: married filing jointly begins single or head of household phaseout begins married filing jointly single or head of household From 1986 to 2017, the tax rate for corporations remained at 20%, and the exemption amount has remained at $40,000.

[54] Generally, interest paid on debt used to acquire, construct, or improve the individual's principal or second residence is unaffected.

[61] The AMT foreign tax credit limitation is redetermined based on AMTI rather than regular taxable income.

However, given the way AMT carryover amounts are recalculated each year, the eventual credit received is in many cases less than originally paid.

Although the AMT was originally enacted to target 155 high-income households, it grew to affect 5.2 million taxpayers each year by 2017, raising $36.2 billion, or 2.4% of federal income tax revenue.

[68] As a result, the tax has affected an increasing number of households each year, as workers' incomes adjusted to inflation and surpassed AMT eligibility levels.

[71] With the passage of the TCJA which eliminated personal exemptions in favor of an expanded standard deduction, this was no longer an issue.

)[73] In 2006, the IRS's National Taxpayer Advocate's report highlighted the AMT as the single most serious problem with the tax code.

[75]In 2013, the IRS's National Taxpayer Advocate recommended repealing the AMT, arguing that it was burdensome, complex, and did not achieve its intended goal.

[76][77] However, CBO's rules[78] state that it must use current law in its analysis, and at the time the above text was written, the AMT threshold was set to expire in 2006 and be reset to far lower values.

[79] Critics of the AMT argue that various features are flaws, though others defend some of these features: In 1986, when President Ronald Reagan and both parties on Capitol Hill agreed to a major change in the tax system, the law was subtly changed to aim at a wholly different set of deductions, the ones that everyone gets, like the personal exemption, state and local taxes, the standard deduction, certain expenses like union dues and even some medical costs for the seriously ill. At the same time it removed and revised some of the exotic investment deductions.

According to the IRS's taxpayer advocate, determining whether someone owes the AMT can require reading nine pages of instructions, and completing a 16-line worksheet and a 55-line form.

[85] The AMT is a tax of roughly 28% on adjusted gross income over $186,300[86] plus 26% of amounts less than $186,300 minus an exemption depending on filing status after adding back in most deductions.

The complexity of the AMT paired with the history of last minute annual patches adjusting the law create tax liability uncertainty for taxpayers.

In other words, many who pay the AMT have incomes that would place them among the wealthy when considering the United States as a whole, but who think of themselves as "middle class" because of the cost of living in their locale.

Allowing a deduction for State and local taxes simply permits taxpayers to finance personal consumption expenditures with pre-tax dollars.

That, coupled with the non-indexation of the AMT, created a slow-motion repeal of the deduction for state and local income taxes.

They are in effect being taxed solely on changes in exchange rates, from which they do not benefit because their household expenses are all in foreign currency.

They suggest an "option [that] would repeal the AMT and replace it with an add-on tax of four percent of adjusted gross income above $100,000 for singles and $200,000 for couples.

This plan, the authors contend, would share the original goal of the AMT—that is, to ensure a certain level of taxation for high earners.

Economist Patrick Fleenor argues that it is usually the unjustifiable limitations on taxable income...that cause the AMT backstop to kick in.