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Running parallel to the regular tax system, the alternative minimum tax (AMT) was enacted in 1969 to require extremely wealthy people to pay taxes when credits and deductions could otherwise reduce or eliminate their tax liabilities. It was first called the Add-On Minimum Tax and was passed in the Tax Reform Act of 1969. However, for various reasons, the reach of the AMT has expanded over time to hit middle-income people it was never intended to tax. During the past several years, Congress has been forced to take temporary measures to restrain the potential scope of the AMT and thus keep it from unfairly taxing millions of people.
Basics Of The AMT
Generally, each year you must pay either your regular-tax liability or your AMT liability: whichever is higher. For most people, the regular-tax liability always turns out to be greater, so the AMT never comes into play. Unfortunately, however, the AMT is hitting a growing number of mere middle-income taxpayers, including people who exercise incentive stock options (ISOs) and hold the shares.
It may seem easy to dismiss the AMT if the AMT rates (26% and 28%) are lower than the marginal rate of your regular tax bracket. However, your income as considered under the AMT system can be much higher than it is under the regular-tax system, because fewer deductions are available in the AMT calculation (e.g. no state and local tax deduction). If this is the case, your AMT liability at 26% or 28% can turn out to be higher than your regular-tax liability, even if your regular tax bracket has a higher rate. Another FAQ discusses ways to limit your AMT liability.
Alert: Do not expect your employer to give you a form with AMT income (AMTI) on it when you exercise incentive stock options, or to warn you when higher income from stock compensation increases the likelihood of triggering the AMT. You must calculate it and any taxes owed, as explained in a related FAQ.
Once you have paid AMT, you may be able to use a tax credit in later years. The rules of the AMT credit have expanded since 2006 (see a related article series and FAQ). In 2008, Congress made it quicker and easier to apply large, old AMT credits.
The Alarming Spread Of The AMT
The Joint Committee on Taxation in the US Congress projects that, without temporary measures to check the AMT, in 2010 the AMT would have hit most taxpayers at the following income levels:
- 52.9% of taxpayers who earn between $75,000 and $100,000
- 85.6% between $100,000 and $200,000
- 98.1% between $200,000 and $500,000
The expanding reach of the AMT is happening for several reasons, including:
- increases in the effective AMT rate
- reductions in marginal rates of ordinary income tax
- the expansion of items considered income for AMT purposes (e.g. the spread on ISO exercises)
- the failure of Congress to index the AMT income exemption amounts for inflation
Further Reading
See the articles and FAQs on this website about AMT topics, including
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