What Is the Alternative Minimum Tax? Who Has to Pay?

Do You Need to Pay the Alternative Minimum Tax?

Woman figuring out AMT taxes
Just like this photo, the AMT is a relic of the 1960s. The AMT makes tax time even more annoying and complex. Photo: H. Armstrong Roberts/Getty Images

Definition: The Alternative Minimum Tax is a mandatory alternative to the standard income tax. It gets triggered when taxpayers make a certain income. It eliminates some deductions for those in higher brackets to make sure they pay taxes. 

That's the annoying part about the AMT. If you make the trigger income, you've got to calculate your taxes twice. That's once for the regular income tax, and once for the AMT.

To add insult to injury, you've then got to pay the higher tax.

The other annoying part about the AMT is that Congress never adjusted the income levels to inflation. That means the definition of wealthy never changed from 1969 levels. That income level would now include just about everyone.

To keep that from happening, Congress passed a "patch" each year that raised the trigger point. Without the temporary fix, families with incomes as low as $30,000 would be subject to the AMT. While the patch protected these families, it also created a lot of uncertainty.

In 2013, Congress permanently set the trigger income levels. It added that the income levels would be adjusted for inflation. Congress added the AMT fix to a law to avoid the fiscal cliff in 2013.

How Is the AMT Different?

The AMT is different from the regular tax rate because it doesn't have the standard deduction or personal exemptions.

It also doesn't allow some itemized deductions, such as the interest on home equity mortgages, state and local taxes and foreign tax credits. The AMT might also include other income streams not counted by the regular income tax. For that reason, the AMT tax is higher than the regular tax.

The AMT tax rate is simpler than the regular tax rates.

There are only two tax rates: 26 percent and 28 percent. If your income is subject to the AMT tax, the rates are 26 percent on the first $186,300 of AMT taxable income, and 28 percent on the rest. But if you are married filing separately, the cut off is $93,500. 

Who Has the Pay the AMT?

You only have to worry about the AMT if your adjusted gross income is above a certain level.  That means you may be subject to the AMT if your 2017 income is greater than: 

  • Single or Head of Household: $54,300.
  • Married Filing Jointly or Widow(er): $84,500.
  • Married Filing Separately: $42,250.

If you make that income or above, that's the AMT taxable income. You may have to calculate the AMT and pay the higher tax. You can do so on Form 6251. Most tax software packages do it for you. You can also go to the IRS AMT Assistant. For details on how to calculate it, and tax tips, see ​Alternative Minimum Tax.

If you qualify, you can't avoid the AMT. But you can adjust your spending to reduce the AMT tax for next year. Here are some tips from TurboTax, "Alternative Minimum Tax: Common Questions."

How Does It Affect the U.S. Economy?

Why hasn't Congress ever gotten rid of the unpopular Alternative Minimum Tax? Our elected officials can't turn down the additional revenue.

The AMT produces around $60 billion a year in federal taxes from primarily the top 1 percent of taxpayers.

On September 27, 2017, the Trump administration released its tax reform plan. It eliminates the AMT. It recoups some of the income by eliminating some of the same deductions that the AMT does. It eliminated personal exemptions and the deduction for state and local income taxes.

History

Congress created the AMT in 1969.  It was originally known as the millionaires' tax. That's because it was designed to make sure they didn't get away tax free. The Internal Revenue Service discovered that 155 millionaires paid no taxes because they used deductions not available to the average worker. The AMT calculation factored them back in. It then applied a higher tax rate if the income reached a certain level.

(Source: "The Alternative Minimum Tax Changes," CNBC, March 22, 2013.)

The Reagan administration expanded the AMT to include more widespread exemptions and deductions. It added the personal exemption, state and local taxes, and the standard deduction. It even targeted deductions like union dues and some medical costs. On the flip side, Reagan's AMT tax reform got rid of some of the more exotic investment deductions that were used only by the very wealthy. (Source: "Alternative Minimum Tax, The New York Times.