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What Is The Alternative Minimum Tax?
What is the alternative minimum tax, often referred to as the AMT? Are you subject to the alternative minimum tax? How do you know if you need to worry about the alternative minimum tax?
The alternative minimum tax became effective in 1970. The original purpose of the alternative minimum tax was to target certain households that had become eligible for so many benefits that they owed every little or even no income tax under the tax code at that time. Over the years, the alternative minimum tax has changed quite a bit with numerous changes being made through the 1980s as well as the 1990s.
At its most basic today, the alternative minimum tax is a type of additional tax that some taxpayers must pay in addition to their regular income tax. The goal behind the induction of the AMT was to make sure that individuals and households with very high incomes were not able to use special benefits to avoid paying taxes. Today; however, there are even some individuals and households who do not have high income levels and who do not claim special tax benefits who have become subjected to the alternative minimum tax.
The rules behind the AMT are supposed to determine the minimum amount of tax that an individual at a specific income level would be required to pay. This means that someone who is already paying that minimum would not need to pay the AMT. If their regular tax amount goes below the minimum; however, they would be required to pay the difference through the alternative minimum tax.
Determining whether you must pay the AMT can be confusing and complicated. In some cases an individual might become subjected to the alternative minimum tax through one large item on their tax return such as interest they claimed on a second mortgage or a deduction they took for state income tax. In some cases, even your deductions related to your dependents and your own personal exemptions could send you over the limit. One of the best ways to determine whether you will be subjected to the AMT is to have a professional prepare your taxes, use a computer program or fill out form 6251 if you are completing your return by hand.
Households with modest incomes ideally should not be subjected to the AMT but changes in the law over the years have created situations in which this has happened. There have been calls for changes to the AMT to prevent this but as of yet, this has not happened.
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