Alternative Minimum Tax: Definition & Example

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  • 0:04 What's the Alternative…
  • 1:13 Controversy
  • 1:55 Example
  • 2:50 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

Despite having been around for more than 50 years, the alternative minimum tax has only recently been updated. In this lesson, learn exactly what it is and see an example of it at work.

What's the Alternative Minimum Tax?

Back in the late 1960s, there were a lot of people that were upset that a number of wealthy individuals, making the equivalent of over a million dollars a year, ended up paying absolutely nothing in federal income taxes. They had completely mastered the system of tax credits, breaks, and deductions to the point of not having to pay a single dime. As you can imagine, this made a lot of people, who were not able to manipulate the system, quite upset. As a result, the alternative minimum tax was passed. In short, it does exactly what its name sets out: It provides a minimum tax rate to individuals who meet its criteria for earnings. However, it remains controversial to this day.

Think of the alternative minimum tax as a parallel tax plan. While everyone's finances are different, people have to pay whichever is greater of the two bills. Luckily, for many people the amount that they pay under the usual tax code is higher. That means that they get to take advantage of all of the usual tax deductions and breaks. However, if your income is too high, you may get stuck having to pay under the alternative minimum tax. This can result in an extra several thousand dollars on your tax bill.

Controversy

Despite mainly targeting the super-rich, the alternative minimum tax is still very controversial. Part of the reason for this is that it has not been adjusted for inflation. Once upon a time, the $200,000 cutoff was considered a very large income. Now some married couples pass that point if both have moderately successful careers. Only in 2012 was the code updated to allow for exemptions related to inflation when it came to the alternative minimum tax.

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