Alternative Minimum Tax (AMT)

Introduction: Alternative Minimum Tax (AMT) is a parallel tax system in the United States designed to ensure that high-income individuals, corporations, trusts, and estates pay a minimum level of tax, irrespective of deductions, credits, or exemptions they may be eligible for under the regular tax system. It was introduced in 1969 to prevent high-income taxpayers from using various tax deductions and credits to avoid paying taxes altogether.

Calculation and Application: Under the AMT system, taxpayers calculate their tax liability using two sets of rules: regular tax rules and AMT rules. They then compare the tax liability calculated under both sets of rules and pay the higher of the two amounts. The AMT rules disallow certain deductions and exemptions allowed under the regular tax system, such as state and local taxes, certain miscellaneous deductions, and the standard deduction.

Thresholds and Exemptions: The AMT system includes exemption amounts that vary depending on filing status. Taxpayers whose income exceeds the exemption amount are subject to AMT. The exemption amounts are adjusted annually for inflation. Additionally, the AMT system includes income thresholds, known as "phaseout thresholds," beyond which the exemption amount is reduced or eliminated entirely.

Effects and Criticisms: The AMT system has been subject to criticism for its complexity and unintended consequences. Many middle-income taxpayers, particularly those in high-tax states or with large families, may find themselves subject to AMT due to disallowed deductions and exemptions. Additionally, the AMT has not been indexed to inflation adequately, leading to an increasing number of taxpayers being subject to it over time.

Question:

Under the Alternative Minimum Tax (AMT) system, taxpayers calculate their tax liability using two sets of rules: regular tax rules and _____ rules.

A) Minimum B) Maximum C) AMT D) Exemption