A little-known but increasingly significant area of the US Tax Code for the majority of taxpayers has to do with the Alternative Minimum Tax, or AMT for short.   The term “majority” is accurate here as what is being forecast indicates that, current laws and rules not changing, for 2008 Tax Year coming up, up to 50 million additional “First-time” individual taxpayers will be affected by this AMT at tax time!

As of early 2008, there has been nary a word mentioned about the AMT by any media, the Presidential electoral hopefuls and the like.   Here is a primer on the AMT and what could be happening by this time next year.

Created in 1961, the AMT was an alternate tax calculation mechanism to ensure that the then-wealthy class of taxpayers did not avoid all taxation.   Back then, the numerous tax brackets that today are present under the 1040 system did not exist, but the tax loopholes did in one form or another.

The AMT performs a separate tax liability calculation, using its own rules and then compares that “bottom line” tax with the 1040 calculated tax.   The larger of the two comparisons thus becomes the taxpayers’ tax.

Largely, the AMT rules throw out a lot of deductions present within the 1040 system to perform its calculations.   Next, one more subtraction of a fixed dollar amount, based on the taxpayers’ filing status, is made to arrive at the AMT taxable income for that taxpayer.  This dollar amount is known as an ‘Allowable Exemption’, and is a lot like the 1040 ‘Personal Exemption’ concept.   This AMT taxable income number is then multiplied by the applicable tax bracket rate, either 26% or 28% to taxpayers whose AMT taxable income is under/over $ 175,000.   This tax is then compared to the 1040 calculation and then the larger tax is thus their tax liability.

That last sentence is important!   The AMT tax brackets are either 26% or 28%, and the threshold is $ 175,000 and applies as under/over $ 175,000 applied to a 26%/28% tax rate.   Even more important is the ‘Allowable Exemption’ fixed dollar amount.

Fast-forward to today.   The AMT has crept into more taxpayers’ existence because that fixed dollar Allowable Exemption amount has never been indexed to cost-of-living or inflation adjusted.   This means that, each year as our wages rise (when they do) we creep closer and closer into that AMT zone because taxpayers’ incomes rise and then go enough over the Allowable Exemption amount to then become affected by the high 26% or 28% tax brackets.   Compare that to the 1040 system, where the Middle-Class tax brackets are 15%, 25% and 28%, but calculate in at different and higher amounts than the AMT tax brackets do!

The individual taxpayer will be liable for either the AMT or the 1040 tax, whichever is higher!

This phenomenon has caused the AMT to be nicknamed the “Middle Class Tax”.   As the 2008 year plays out and we move closer to electing a new President, Congress should be made more aware of the big concerns to taxpayers and the need to materially modify or eliminate the AMT as the concept now applies.   Hopefully, due publicity and lobbying efforts will serve as the catalyst needed to prompt Congress into action!



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