Alternative Minimum Tax (AMT)
Alternative Minimum Tax
A tax in the United States intended to be levied on very wealthy
persons who are eligible for so many deductions
that they would otherwise have little or no tax liability
. To arrive at the AMT, one adds certain deductions back into a person's adjusted gross income
and then subtracts the AMT exemption
, which results in the alternative minimum tax income
. The taxpayer
then pays a percentage of the alternative minimum tax income rather than his/her AGI. The AMT is controversial in the United States because it is not indexed
, meaning that upper middle class families are gradually becoming subject to it, rather than only the very wealthy. See also: Tentative minimum tax, Bracket creep
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alternative minimum tax (AMT)
A federal tax on taxable income as adjusted for specific tax-preference items, such as passive losses from tax shelters and interest paid on certain municipal bonds. The intent of the tax is to ensure that nearly all individuals pay at least some tax on their incomes. The alternative minimum tax is most likely to apply to individuals with high incomes when a relatively large portion of their income is sheltered from taxation under normal reporting. Also called minimum tax
. See also private activity bond
Case Study Municipal debt issues sometimes contain both AMT and non-AMT bonds. This combination is especially prevalent when public housing authorities issue debt securities. In April 2000 the Georgia Housing and Finance Authority issued $40 million of single-family mortgage bonds with maturities that ranged from June 1, 2001, to December 1, 2031. The AAA-rated issue included approximately $38 million of bonds that paid interest subject to the federal alternative minimum tax. The remainder of the bonds were of the non-AMT variety. AMT bonds are less desirable to own than non-AMT bonds because of the potential tax liability resulting from interest payments received. Because interest on AMT bonds is considered a preference item in calculating the alternative minimum tax, AMT bonds tend to have higher yields compared to non-AMT bonds from the same issue. In the case of the Georgia Housing and Finance Authority issue, AMT bonds maturing on June 1, 2011, provided buyers with a yield of 5.55%, while non-AMT bonds from the same issue maturing on the same date offered a yield of 5.25%. AMT and non-AMT bonds maturing on other dates offered a similar yield difference. The 30-basis point yield advantage of the AMT bonds was a bonus for investors who did not have to worry about paying the alternative minimum tax.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
Alternative minimum tax (AMT).
The alternative minimum tax (AMT) was designed to ensure that all taxpayers pay at least the minimum federal income tax for their income level, no matter how many deductions or credits they claim.
The AMT is actually an extra tax, calculated separately and added to the amount the taxpayer owes in regular income tax. Some items that are usually tax exempt become taxable and special tax rates apply. For example, income on certain tax-free bonds is taxable.
Increasing numbers of taxpayers trigger the AMT if they deduct high state and local taxes or mortgage interest expenses, exercise a large number of stock options, or have significant tax-exempt interest.
alternative minimum tax
Tax reform enacted in 1969 as a result of the increasing financial burden of the Vietnam War.It was designed to impose a flat tax upon wealthy individuals who used all available tax shelters and loopholes in order to avoid paying any taxes at all.The treasury secretary at the time, Joseph Barr, warned against a taxpayer revolt once it became widely known that the country had 155 citizens who made over $200,000 per year but paid no income taxes at all,and 20 of them were actually millionaires! His predictions were accurate; more people wrote their congresspersons to complain about the 155 “tax cheats”than wrote to complain about the Vietnam War.
To remedy the situation, Congress revised the Internal Revenue Code so that complex calculations must be performed as if certain tax preference items were not deductible and then a minimum tax imposed on that figure so that “wealthy”individuals would pay their fair share of the tax burden.The problem with the system is that it is not indexed for inflation,so a 1969's wealthy individual is today's typical two-income middle-class family.The New York Times predicts that, by the year 2010, nearly 30 million taxpayers will have to pay the alternative minimum tax. There is increasing pressure to abolish the tax entirely,or to revise it to provide relief for middle-class Americans.
The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.
Alternative Minimum Tax (AMT)
A method of computing tax under which some of the income and deductions reported on the forms and schedules filed with your tax return are figured differently or disallowed. For example, interest on certain tax-exempt bonds is taxable for the alternative minimum tax, certain itemized deductions are not allowed when figuring the alternative minimum tax, and the alternative minimum tax has its own exemption amount, not based on the number of exmptions claimed on your tax return. A taxpayer pays the larger of the "regular tax" or the alternative minimum tax. The alternative minimum tax is computed on Form 6251.
Copyright © 2008 H&R Block. All Rights Reserved. Reproduced with permission from H&R Block Glossary