Question

Many taxpayers are surprised when they are hit by the AMT at year end and there is pressure to repeal it. Research and find the average percentage of taxpayers, individuals and corporations that have been subject to AMT in the last 5 years. Comment on your findings and discuss whether the AMT should be maintained or repealed and provide justifications for your position.

Answer 1

The Alternative Minimum Tax is a mandatory alternative to the standard income tax. It gets triggered when taxpayers make more than the exemption and use many common itemized deductions. The reason the AMT catches those in higher tax brackets is because it eliminates many of those deductions.

That's the annoying part about the AMT. If you make more than the AMT exemption amount and use the deductions, you've got to calculate your taxes twice.

That's once for the regular income tax, and once for the AMT. To add insult to injury, you've then got to pay the higher tax bill.

The AMT is different from the regular tax rate because it doesn't have the standard deduction or personal exemptions. It also doesn't allow popular itemized deductions. These include state and local income taxes, foreign tax credits, and employee business expenses. It doesn't allow the interest on home equity mortgages, unless it was used to improve your home. Real estate and personal property taxes are not deductible.

You only have to worry about the AMT if your adjusted gross income exceeds the exemption. If you make that income or above, that's the AMT taxable income. You may have to calculate the AMTI and pay the higher tax. You can do so on Form 6251. Your tax software package will also do it for you. You can also go to the IRS AMT Assistant.

Once you qualify for the AMT in a tax year, you must pay it. But you can adjust your spending to reduce the AMT for next year. There are four common methods.

1. If you are an employee, get your company to reimburse you if at all possible.
2. Make sure your state tax withholding isn't higher than your expected payment. State tax payments aren't deductible under the AMT.
3. Pay your property taxes only when they're due. Don't prepay your next installment by the end of the year. .
4. Sell exercised incentive stock options in the same year you exercise them. If you exercise the options, but don't sell, the value of the exercised options becomes income for AMT purposes.

The AMT does not affect everyone above the qualifying income thresholds. Before the new tax bill, it had the most impact on households earning between $500,000 and $1 million annually. But even in that bracket, only 62.9 percent paid the AMT. Here is the breakout for 2017, according to the Tax Policy Center.

Why didn't Congress eliminate the unpopular Alternative Minimum Tax, as Trump promised? Our elected officials can't turn down the additional revenue. The AMT produces around $60 billion a year in federal taxes from the top 1 percent of taxpayers. For that reason, it is a progressive tax.

About $38 billion in 2017, or about 2.5 percent of all individual income tax revenue. By 2027, AMT revenue will total $60 billion, or 2.4 percent of all individual income tax revenue.

In 2017, the AMT is expected to generate $37.7 billion, or about 2.5 percent of individual income tax revenue. Despite ATRA’s permanent fix to the AMT, real income growth over the coming decade will push more taxpayers into the income ranges hit by the tax. Thus, AMT revenue is projected to grow to $59.6 billion by 2027 (figure 2), even though the AMT’s share of total individual income tax revenue will remain roughly constant