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Having discussed in length taxation in the federal, state, and local levels in the United States of America, it might be best to take up in better detail some of the taxes and fees levied by the government (whether it is in the federal, state or local levels) that have not been completely and thoroughly explained in the previous articles. One such tax is the alternative minimum tax, and of course, that is what we will be taking up for now.

To be clear: the alternative minimum tax is a federal tax, which means it is not applicable in the state or local levels. Also, it should be remembered that the alternative minimum tax is an income tax – meaning, of course, that its rates cannot be levied on anything other than income. The alternative minimum tax is usually regarded as an “extra tax”, that some taxpayers are required and expected to pay on top of the regular tax liability. It is, as a tax system, quite separate from the regular income tax system – which, of course, means it has rules that are uniquely its own.

There are, in fact, two kinds of alternative minimum tax: one is applicable to those who are paying personal income tax, while the other is applicable to corporate income tax. We will discuss the alternative minimum tax applied to the personal income tax first – but before that, let us delve into the brief but fascinating history of the alternative minimum tax.

Some time in the 1960’s it became quite clear that some high-income households are managing to legally avoid paying their taxes by means of applying for eligibility for certain tax benefits – the tax system at the time, of course, allowed for such loopholes. This caused a lot of problems for the federal government in terms of raising revenue because of many factors – including but not limited to the fact that many of the less fortunate masses (the middle class) feel cheated and think that the high-income taxpayers are favored and thus given more exemptions, and the fact that the tax rates (should they be payed by the high-income taxpayers) will be a fairly high value, if not percentage, in terms of revenue collected. This is why in 1969, the Tax Reform Act of 1969 included the alternative minimum tax in its reforms – the alternative minimum tax was enacted immediately the next year.

This begs the question of who falls under the category of the taxpayers that would have to pay the alternative minimum tax. And while most may know the answer to this question, we may as well go off another tangent and discuss tax liability in the context of the regular income tax system versus tax liability in the context of the alternative minimum tax system.

Under the regular income tax system, the regular tax liability for a standard tax year allows for certain exemption amounts, though that doe not mean that there are no exemptions that apply to the alternative minimum tax – in the case of personal income taxpayers (or, as the US Code refers to them, taxpayers other than corporations), the exemption amount of the alternative minimum tax is forty-five thousand dollars in the case of a return shared with another person or in the case of husband or wife that survives you, thirty-three thousand seven hundred and fifty US dollars in the case of unmarried individuals or individuals who are not the surviving husband or wife, fifty percent of the dollar amount of forty-five thousand dollars should one decide to file a separate return from his or her spouse, and twenty-two thousand five hundred dollars in the case of an estate or trust. Then, there are the various deductions that were mention in the previous articles describing federal income taxation which further lowers the amount of tax to be paid by an individual. These values are, of course, subject to changes in the events of various amendments and reforms, but otherwise the current system in place allows for the dollar values and circumstances listed above.

That being said, the tax liability of the alternative minimum tax system still allows for fewer of the exemptions and deductions that are applicable to the regular income tax system. It should be remembered that the minimum rate of the alternative minimum tax for personal income taxpayers moves between twenty-six percent or twenty-eight percent of a taxpayer’s income, the difference depending on the adjusted alternative minimum taxable income. Again the function of the alternative minimum tax system is to ensure that some taxpayers would not be allowed to lower their taxes to a point wherein they would be almost nonexistent. This particular tax is applied to individuals who have what is referred to as “tax preference” items. Tax preference items include but are not limited to the following: long-term capital gains (that is, profits on capital asset exchanges), accelerated depreciation (that is, when certain assets whose values decrease over time lose value much more quickly), percentage depletion (that is, where the flat percentage of the income is at a loss), some medical expenses, some tax exempt income, and particular credits, standard deductions and personal exemptions.

Now that we have that settled, we can move on to discuss how exactly the alternative minimum tax works. The fact of the matter is, the principle of the alternative minimum tax is deceptively simple: a taxpayer who falls under the category as detailed above – a taxpayer who has certain “tax preference” items to be detailed in his or her tax return – will be asked to calculate his or her taxes under both the standard income tax system and the alternative minimum tax. If the taxpayer’s tax in the alternative minimum system turns out to be a larger amount or value than that of the resulting tax under the regular taxation system’s rules, then the taxpayer will be expected and required to pay the excess amount. In other words, we take the resulting amount of both tax systems, subtract the value of the regular income tax from the value of the alternative minimum tax, and we will arrive at the amount that the regular taxpayer has to pay as alternative minimum tax – on TOP of the regular tax to be paid – thus awarding the alternative minimum tax a title of an “extra” or “additional” tax.

In order to better understand this, we will have to take up the STRUCTURE of the alternative minimum tax system in order to understand how it is calculated. One important thing that we should remember is that one takes into account the regular tax code calculations when trying to determine the taxable income in the alternative minimum tax system, but EXCLUDES certain allowable deductions and adds the tax preference items listed above. In other words, the taxable income in the alternative minimum tax system pretty much most of one’s income minus the AMT exemptions. (To be continued in next article)