Question

Discuss the purpose and effects of the Alternative Minimum Tax (AMT).

Answer 1

Background of Alternative Minimum Tax (AMT) : Over a period of time, the Government introduced various incentive through deduction in income if the income is invested in specific industry. This was done to promote a particular industry. The tax payers given benefit of low tax payment because they invested their income in such long teram investment. Also on maturity of such investment, they get benefit of capital gain.

It was observed that due to such scheme by government, many tax payers were taking undue advantages and paying nil taxes. But when it comes to take care of social welfare and development, government need fund and the question comes that where will these fund come from? The answer is tax.

Hence the Government introduced concept of AMT.

What is Alternative Minimum Tax: As its name speak, it's an alternative to the regular income tax. Applicable rate is 26% This is applicable to individual tax payer. It is over and above the regular tax. Hence, irrespective of regaular income tax, AMT has to be paid.

Applicability of Alternative Minimum Tax : AMT is applicable to all non corporate tax payers and all other tax payers who has claimed the deduction under certain income such as small scale industry, Hotel Industry, export of certain products, housing contruction business and infrastructure development etc.Also applicable to tax payers who has taken benefit of deduction-100% deduction is allowed on capital expenditure and fertilizer production etc. Few tax payers who has claimed deduction under profit linked investment like special economic zones are alos under umbrella of AMT.

Example of AMT- There is exemption amount of $71700 ( 2019) and your income comes to $75000 then your income is over by $4300 on threshold limit.Your AMT would be 26% of this amount and you will have to pay addtional $1118 over and above your normal tax liability.

Exemptions: $72900 and $113400 for singles and married (filing jointly) respectively.

28% threshold limit = $197000 for both married and singles.

Exemption phseout threshold limit= $518000 for singles and $1036800 for married filing jointly.

NOTE : First the regular income tax is calculated with all deductions and additons and then AMT preference items are added back to taxable income.From this amout, the standard deduction under AMT is deducted and tax liability is recalculated.Any positive difference considered for AMT tax liability.