Who is Most Affected by the Alternative Minimum Tax?

Apr 4th 2016
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Amid the political rhetoric about taxes and reform and higher-income households, the alternative minimum tax (AMT) has earned its fair share of attention, with three of the four presidential candidates proposing to eliminate it.

That’s because, as Tax Foundation analyst Scott Greenberg noted in a recent blog, “a fundamental reform of the US tax code would alleviate many of the problems that the AMT was created to fix. So, proposals to eliminate the AMT should not be evaluated in isolation, but as part of broader tax reform plans.”

Of the 3.9 million households that face the tax annually, the Tax Foundation breaks them down this way, according to 2013 statistics:

  • The majority (62.51 percent) of taxpayers subject to the AMT are in the $200,000 to $500,000 income range. In the $500,000 to $1 million range, 43.83 percent of taxpayers are levied, while 24.33 percent earning $10 million or more must pay it.
  • The more kids in a household, the greater the likelihood of facing the AMT because the tax exemption doesn’t increase commensurate with the number of kids.
  • About 3.8 million out of the 3.9 million households that pay the AMT itemize deductions. (One of the chief purposes of the AMT is to limit the benefit of itemized deductions, according to the Tax Foundation.)
  • Taxpayers in high-tax states are more likely to incur the AMT. In New Jersey, 81.6 percent of taxpayers in the $200,000 to $500,000 income range face the AMT. In Wyoming, about a quarter of taxpayers in that range incur the tax. (The AMT doesn’t allow a deduction for state and local taxes paid.)

According to the Tax Foundation blog, critics note the AMT’s complexity, describing it as a “parallel tax system, in which taxpayers are required to calculate their tax bill a second time over, using different rules and definitions.”

AMT fans, on the other hand, like that it disallows many of “the deductions and preferences that clutter the US tax code,” according to the blog.

The AMT also levies a lower marginal tax rate of 28 percent than the usual 39.6 percent.

As for the presidential candidates’ viewpoints? The Tax Foundation indicates that Donald Trump, Sen. Ted Cruz, and Sen. Bernie Sanders have proposed to abolish the AMT. Hillary Clinton would create a new minimum 30 percent rate on taxpayers earning more than $1 million.

Related article:

The ABCs of the Alternative Minimum Tax: Strategies for Your Clients

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