Alternative Minimum Tax

2006-01-15

Alternative minimum tax (ATM) is an additional tax that you can be forced to pay on top of your normal income tax. This tax is a part of the federal taxation income tax system. Alternative minimum tax was invented in 1970 as a way of hindering people with very high incomes to pay very low taxes. In 1970, the mainstream tax code made people with very high incomes eligible for a wide range of substantial exemptions that caused them to pay little or no tax at all. Today, it is no longer only the richest Americans that are affected by the alternative minimum tax. For various reasons the alternative minimum tax has begun to target even people with much more moderate incomes and individuals that are not eligible for a lot of exemptions. Congress has begun to research this problem and is trying to find a way of correcting it, but most analysts believe that this predicament will not be quickly corrected since it is a complicated issue to handle. In the mean time, more and more people are trying to find a way to avoid alternative minimum tax.

The name “Alternative minimum tax” is derived from the fact that the alternative minimum tax is based on an alternative set of rules for calculating income tax. The theory behind these rules is that they should determine the minimum amount of tax for a person with a certain income. A person that is already paying this amount of money via his or her normal income tax should therefore not be forced to pay any additional tax. A person with a high income that pays little or no normal income tax should on the other hand be forced to pay at least the alternative minimum tax.

In order to avoid alternative minimum tax you need to understand the mechanism behind the calculation of your alternative minimum tax. It can be very hard to avoid alternative minimum tax, since a multitude of different factors will be accounted for. Claiming a lot of exemptions can for instance increase your risk of having to pay alternative minimum tax. When trying to avoid alternative minimum tax you should also keep in mind that AMT only allow deduction for interest if you used the borrowed money to buy or build your home, or if the money has been spent on improvements. If you have used the money for something else, your deduction will not be allowed when your ATM is calculated. Other things that can affect your ATM and that you need to look further into in order to avoid alternative minimum tax are medical expense deductions, personal credits, claiming standard deduction instead of itemized deductions, un-reimbursed employee expenses, investment expenses, tax preparation fees and incentive stock options.

The alternative minimum tax has been heavily criticized for being obsolete and unfair. The alternative minimum tax does not adjust according to inflation, which makes it rather unpredictable over any longer period of time. Since 2004, the alternative minimum tax is affecting even people with middle-class incomes. Since the entire system is a highly complicated web of rules the alternative minimum tax is associated with high compliance costs. This complicated system also means that it is very difficult for the middle-class to avoid alternative minimum tax, while the people that the tax was originally intended to target can hire expensive professionals to help them avoid alternative minimum tax. The alternative minimum tax has also been criticized for being unfair to citizens living in high tax states, since local tax and state tax are not deducted when the alternative minimum tax is calculated.

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