Unformatted text preview: selling side). If a tax is placed on
one side of the market, it can affect
the other side. Do you agree or disagree? Explain your answer. 14 (364-389) EMC Chap 14 11/18/05 10:58 AM Page 369 The Alternative Minimum Tax
The alternative minimum tax (AMT) is a
tax that some people have to pay on top of
their regular income tax. The original idea
behind the tax was to prevent persons with
high incomes from paying little or no taxes
because of their claiming certain tax benefits. Congress enacted the AMT in 1969 following testimony by the secretary of the
Treasury that 155 people with adjusted
gross income above $200,000 had paid zero
federal income tax on their 1967 tax
returns. How It Works
The name—alternative minimum tax—
comes from the way the tax is designed to
work. In short, for a given income, a minimum tax is computed; then, if you are paying at least that amount of taxes, you don’t
pay the alternative minimum tax, but if you
are not paying at least that amount, you do.
Suppose the minimum amount of taxes
usually paid by a person earning $75,000 a
year is $15,000. This $15,000 becomes the
benchmark against which others are measured. If Smith, who earns $75,000, is not
paying at least $15,000 in taxes, then he is
subject to the alternative minimum tax. If
Jones, who earns $75,000, is paying at least
$15,000 in taxes, then he is not subject to the
alternative minimum tax. Why It Is Affecting More People
When the alternative minimum tax was
first put into place in 1969, fewer than
1 percent of all taxpayers were affected by it.
Today, more than 3 percent pay AMT. If the
alternative minimum tax retains its current
structure, 20 percent of taxpayers, or 30
million Americans, will be subject to it by
2010. By 2015, the AMT will affect 50 million people.
What happened? Why have so many
more people fallen under the umbrella of
the alternative minimum tax in recent years?
Two factors are responsible.
Inflation The first is inflation. Because of
inflation, individuals find that their dollar incomes increase. Think of it this way:
A person sells apples at 20 cents each.
Inflation raises the prices of most goods,
including apples, which rise to a price of 30
cents each. Before inflation, the apple seller
received an “income” of 20 cents an apple;
now she receives an “income” of 30 cents
The regular income tax is adjusted for
inflation; the government doesn’t simply
look at your higher dollar income and conclude that you are better off because of it.
Government realizes that although you have
a higher dollar income, prices are higher too,
and your higher dollar income might not
buy you any more at the higher prices than
your lower dollar income bought you at
Even though the regular income tax is
adjusted for inflation, the AMT is not.
When inflation raises a person’s dollar
income, it moves him upward toward the
income level at which the alternative minimum tax kicks in.
Tax Cuts The second factor causing more
people to be subject to the AMT is the
income tax cuts in 2001 and 2003. We realize
this statement sounds odd, but keep i...
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This document was uploaded on 01/16/2014.
- Winter '14