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

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 the AMT Is 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 popular itemized deductions.

These include state and local income taxes, foreign tax credits, and employee expenses. It doesn't allow the interest on home equity mortgages, unless it was used to improve your home. Real estate and personal property taxes are not deductible.

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

Once you qualify for the AMT in a tax year, you must pay it. But you can adjust your spending to reduce the AMT for next year. 

For that reason, the AMT does not affect everyone above the qualifying income levels. For example, it has the most impact on households earning between $500,000 and $1 million annually.

But even in that bracket, only 62.9 percent pay the AMT. Here is the breakout for 2017, according to the Tax Policy Center.

IncomePercent Who Pay AMT
$0 - $75,000                                     0%
$75,000 - $100,000                      0.2%
$100,000-$200,000                    1.9%
$200,000-$500,000                  29.4%
$500,000 - $1M                           62.9%
$1M+                                             19.9%

The AMT is more likely to snare married taxpayers with children, for several reason. First, they often have higher incomes, especially if both parents are working. Second, the AMT does not have additional exemptions for each household member. Third, there is no "marriage bonus" under the AMT.

How It Affects 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. 

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