Alternative Minimum Tax: The IRS’s Gift to the Wealthy
When it comes to taxes, no one likes surprises. But that’s exactly what you’ll get if you’re subject to the Alternative Minimum Tax (AMT).
What is the AMT? In short, it’s a parallel tax system created by Congress in 1969 as a way to ensure that wealthy Americans couldn’t use deductions and credits to avoid paying their fair share of taxes.
The idea behind the AMT was noble enough: make sure that everyone pays at least some minimum amount of tax, regardless of how many loopholes they can find. But like so many things involving taxes and government regulations, the reality has turned out quite differently.
For starters, the AMT wasn’t indexed for inflation until 1986. That means that over time, more and more middle-class taxpayers have been caught up in its web. The IRS estimates that without changes to the law, nearly 30 million taxpayers would be subject to the AMT by 2025.
Another problem with the AMT is that it doesn’t take into account differences in cost of living or regional wage disparities. So someone making $200k a year in San Francisco might end up paying AMT while someone making $200k a year in rural Nebraska might not.
To make matters worse, calculating your AMT liability requires filling out an entirely separate set of tax forms. And because there are different rules for calculating deductions under both systems, it often means doing your taxes twice – once normally and once using the alternative method.
All this complexity leads to confusion and mistakes – which is exactly what happened last year when Congress passed its massive tax overhaul bill. Because lawmakers rushed through their changes without fully understanding all their implications (surprise!), millions of filers ended up owing more than they expected due to changes in both regular income taxes and new limits on state and local tax deductions used when calculating for AMT purposes.
So who benefits from the AMT? Primarily wealthy taxpayers. In fact, a 2017 report from the nonpartisan Tax Policy Center found that nearly 70% of all AMT liability was paid by households with incomes over $500k per year.
What’s more, there are plenty of ways for these high earners to avoid paying any AMT at all – such as by investing in tax-exempt municipal bonds or using certain types of tax-deferred retirement accounts.
In other words, the people who were supposed to pay the most under the AMT system end up paying little or nothing – while middle-class Americans get stuck with extra paperwork and even higher tax bills than they expected.
The good news is that Congress has made some attempts to reform (or even repeal) the Alternative Minimum Tax over the years. The bad news is that those efforts have been hamstrung by partisan politics and special interests.
One thing we can be sure of: as long as our tax code remains convoluted and subject to manipulation, Americans will continue to feel frustrated and confused come April 15th – no matter how much money they make.