The Alternative Minimum Tax Explained

Originally, this tax was meant to hit a little over one hundred families who had taken advantage of so many tax deductions that they did not owe much in income taxes. This came into effect back in 1969. These were high net worth families who were using tax shelters and finding ways to lower their tax bills to as little as possible. The alternative minimum tax laws have changed to a degree but they have continued to affect more and more people as the years have gone on.


To give a short explanation of what it is, alternative minimum tax is a form of taxing that takes away many of the deductions that other taxpayers are able to claim. With it, there is a minimum tax rate usually around 26% to 28%. Some of the different deductions that are not allowed to be used include: accelerated depreciation, some itemized deductions, among others. The end result is that it makes you pay a certain graduated minimum amount in taxes based upon your income.


When attempting to figure out whether you owe alternative minimum tax, there is a different set of rules that are applied than when dealing with regular taxation laws. Taxable income is calculated and certain tax preference items (usually your deductions-talking about examples from above like accelerated depreciation) are added back in to your income. An alternative minimum tax exemption is subtracted off this income and then your minimum tax is calculated from that figure. This exemption has gone up over the year but only when new legislation is enacted by Congress. For anyone who is filing as single or head of household in 2009, the exemption is listed at $46,700 while anyone who is filed married jointly has an exemption of $70,950. Once you have your net income figure from using your income minus the exemption, you then calculate .26X your net income. If you make over $175,000, you multiply .26x $175,000 + .28x remaining income. This will let you know the minimum amount of tax that you owe. If this amount is less than your regular tax bill, you do not owe any more taxes. If the alternative minimum tax is greater than your regular tax bill, you owe the IRS extra money.


This particular tax form has faced sharp criticism because there has been no change within the tax code to account for inflation. This has affected a significant number of people and the Congressional Budget Office has estimated that by 2010, one in five people will be affected by the alternative minimum tax. This goes even further that any married person making between $100,000 and $500,000 will face this same situation using the same estimates from the Congressional Budget Office.


As you can see from this article, the alternative minimum tax is not a good thing for most people. It is something that Congress has looked into but not made any changes to the tax code yet through legislation.