US Alternative Minimum Tax

As a part of the American Federal Income Tax System, the US Alternative Minimum Tax or AMT is of two main types, one for the individuals and the other on company level. 26 U.S.C. § 55 provides for the imposition of the Alternative Minimum Tax, outlawing several exemptions and deductions permitted while calculating the liabilities associated with regular tax.

Alternative Minimum Tax is an additional tax paid by certain people along with their regular income tax. At the time of calculating the Alternative Minimum Tax, there is addition of some tax preferences into the adjusted total income. In that case, if the Alternative Minimum Tax is more than the regular tax liability of a person for a particular year, the regular tax and the amount by which the Alternative Minimum tax increases are paid together. In fact, the Alternative Minimum Tax is designed in a way to inhibit the taxpayers from evading their reasonable share of tax liability, by making use of some tax breaks. Giving preference to certain types of income, the Alternative Minimum Tax permits special credits and deductions on some kinds of expenditures.

An Alternative Minimum Tax is structured in a way so as to remove multiple credits and deductions, increasing an individual’s tax liability who otherwise makes less tax payment. The uncertain minimum tax rates on ordinary income are then calculated on the basis of the percentages set by the law of United States. In case of some dividends and capital gains, the rate of Alternative Minimum Tax with respect to the regular tax is applied.

The Alternative Minimum Tax impacts a small, growing percentage of taxpayers. At the time of its application, the cost can be considerable. However, owing to the complex nature of the tax, it really becomes difficult to predict the actual time of its application. For the matter, computation of Alternative Minimum Tax is done at times when the tax is not applied.

United States Alternative Minimum Tax: more facts

With respect to individuals, the rate of Alternative Minimum Tax is set at the lowest, either 26% or 28%, based on the income amounts of the taxpayers coming under the tax, after adjustments. The reason for minimizing the tax rate is to inhibit the taxpayers from using some types of deductions to decrease their payable tax amounts.

Contrarily, on company levels, the rate of Alternative Minimum Tax is 20%. Those affected by the imposition of this tax are well-equipped with what is called the “Tax Preference Items”. These tax preference items comprise standard deduction, some tax-exempted income, percentage depletion, some credits, long-term capital gains, personal tax exemptions, some medical expenditures and increased depreciation.

Introduced by the 1969 Tax Reform Act, the Alternative Minimum Tax became functional from the year 1970. Its intention was to aim those American families who were eligible for several tax benefit schemes, yet paid little or no income tax under the then existing tax codes.

Currently, the Alternative Minimum Tax is under intense monitoring. Since the AMT is neither inflation indexed nor coming under the latest tax deductions, it has brought the taxpayers under the purview of this tax, having high to medium incomes.

Very recently in 2006, the National Taxpayer Advocate’s report of the IRS pointed out that Alternative Minimum Tax has culminated into grave problem, with respect to the American tax codes. According to the report, the AMT appears to be punishment to those taxpayers who are either paying high taxes or have children. Further, the complications arising out of Alternative Minimum Tax culminate into the taxpayers not realizing their taxes unless their returns are filed and they are informed by the tax collecting authorities to do so.

Functions of Alternative Minimum Tax:

In fact, the name itself reveals the functions of Alternative Minimum Tax. This tax comes out with alternative rules for computing the income tax of an individual. Theoretically, it is these set of rules which decide the minimum tax amount a person is required to pay. All those already paying income tax to that extent, are exempted from paying the AMT. However, if the amount of regular tax falls below the minimum level, then the difference is made up through the payment of Alternative Minimum Tax.

Payment of the AMT seems to be mandatory, if the taxable income for regular tax payers along with the preference items and adjustments applicable on the concerned person exceeds the exemption amounts of AMT. The filing of these exemption amounts is done as per the law, and listed in the Form 6251 Instructions.

Criticisms of Alternative Minimum Tax:

The American Alternative Minimum Tax is criticized on the following few grounds as follows:

• Like all other taxes, the Alternative Minimum Tax is distortionary in nature. As a result, it considers the income from “specified private activity” municipal bonds (MUNIs) as taxable, at the time of computing the tax amount.
• The Alternative Minimum Tax does not recognize foreign tax credit, leading to inevitable double taxation for about 8 million Americans and even more staying abroad. This system of double taxation is also imposed on several families having low income, owing to fluctuations in the currency.
• An Alternative Minimum Tax is known to eliminate the deductibility, in case of local and state taxes, leading to double taxation for a handful of taxpayers.
• The Alternative Minimum Tax is levied on the capital gains of several years, though it is treated only as a tax imposed on within-year capital gains. In this case, if a taxpayer carries forward his/her previous year loss made from stock trading, it is not possible for him/her to deduct the lost amount at the time of calculating and determining the Alternative Minimum Tax.