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The Alternative Minimum Tax: Its Purpose and Potential Drawbacks

With the recent release of President Trump's 2005 tax return, many millions of Americans were introduced to the Alternative Minimum Tax (AMT). In fact, of the $38.4 million Trump paid in taxes in 2005, $31 million came from the AMT. With the AMT in the news, this is a good time to look at why the AMT exists, as well as potential pitfalls associated with the law.

The purpose of the AMT

As the name implies, the AMT forces taxpayers who reach certain income thresholds to pay some minimum amount of income tax. With an AMT, higher earners and the wealthiest should not, at least in theory, avoid paying income tax through the use of various deductions. All taxpayers, including individuals, families and businesses could be subject to the AMT if their income reaches certain levels. As a result, taxpayers should calculate their taxes under both the standard tax laws and the AMT.

Disadvantages of the AMT

President Trump's 2005 tax return is a textbook example of how the AMT should work, according to some. Unfortunately, this case is all too rare. According to many tax professionals it all too often disproportionately burdens those who:

  • Live in high-tax states
  • Have larger families

Let's discuss people who live in states with high tax rates first. For instance, people who live in the State of New York pay anywhere from 4% to 8.8% in state income taxes. People who live in New York City will pay additional local city income taxes. While state and local taxes can be deducted from income taxes, the AMT bars these deductions. Therefore, many New York taxpayers who are subject to the AMT would not be, had they lived in a state with lower state income tax rates.

Larger families are also disproportionately subjected to the AMT. According to Jack Surgent, the founder and chairman of Surgent CPE, a leader in providing continuing education to tax professionals, states the following: "[F]amilies of three or more kids ... are four and a half times more likely to pay AMT as opposed to families with no children (8.1% to 1.8%)." Again, the reason these families pay the AMT is because most deductions for dependants, are barred under the AMT.

Furthermore, the AMT does not even necessarily force higher earners to pay income tax. In 2013, The Taxpayer Advocate, a federal organization that serves the interests of taxpayers, advocated the repeal of the AMT. In its presentation, it noted that roughly 1,000 millionaires were not expected to pay any income tax that year. Given these issues, it may be time for lawmakers to take a close look at updating, overhauling or even eliminating the AMT.

Taxpayers with serious tax issues require legal counsel of the highest caliber. The attorneys of Goldburd McCone LLP represent businesses and individual taxpayers throughout New York and beyond in the complete range of tax controversies.

Sources: AMT, Which Hit Trump in 2005 Taxes, Is No One's Favorite, New York Times, by Patricia Cohen, March 15, 2017, Repeal the Alternative Minimum Tax, The Taxpayer Advocate, 2013 Legislative Recommendations, Trump's Vow to Abolish The Alternative Minimum Tax: Why This Could Mean More Cash Flow for Families, Surgent CPE, Nick Spoltore, December 14, 2016

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