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Financial Planning > Tax Planning > Tax Deductions

Who Pays the Dreaded AMT?

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Which taxpayers get ensnared by the Alternative Minimum Tax? Turns out nearly 4 million taxpayers must pay this wildly unpopular tax that four of the remaining presidential candidates (except for Hillary Clinton) have pledged to eliminate.

In 2013, 62.5% of households with income between $200,000 and $500,000 were subject to the AMT, the highest rate out of any income group, according to the Tax Foundation. Among households bringing in between $100,000 and $200,000, only 3.8% fell under the tax.

The AMT was created in the 1960s as a way to keep wealthy taxpayers from using loopholes to avoid paying taxes, but because it was not automatically updated for inflation, it ended up hitting more middle-class taxpayers.

Congress was forced to “patch” the AMT by raising the exemption amount to prevent middle-class taxpayers from being hit by the tax.

On Jan. 2, 2013, the American Taxpayer Relief Act of 2012 indexed the income thresholds to inflation, preventing the need for an annual “patch.”

The AMT exemption amount for 2016 is $53,900 for singles and $83,800 for married couples filing jointly.

According to the Tax Foundation, the AMT functions as a surtax on high-income taxpayers living in high-tax states who also have children.

For instance, in New Jersey, 81.6% of households earning between $200,000 and $500,000 fall under the AMT, while in Wyoming, only 26.3% of households in the same income range are subject to the AMT. Why? Because the AMT does not provide a deduction for state and local taxes paid, as the regular tax code does, the Tax Foundation states.

Households with more children are also more likely to get hit by the AMT because the AMT does not provide a larger exemption for those households as the regular tax code does, the Tax Foundation states.

Bernie Sanders and the three leading Republican candidates — Donald Trump, Marco Rubio and Ted Cruz — have all proposed eliminating the AMT, while Hillary Clinton would keep the AMT and add a second minimum tax to the U.S. code – the Buffett rule.

The Tax Foundation’s research also gives the following stats about those affected by the AMT:

  • If a household makes less than $200,000 a year, it is very unlikely that it will be subject to the AMT. Among households making between $100,000 and $200,000, only 3.8% fell under the tax.
  • In 2013, 62.5% of households with income between $200,000 and $500,000 were subject to the AMT.
  • Almost all households that are subject to the AMT are ones that itemize deductions (3.8 million out of 3.9 million).

— Check out From Clinton to Trump: Tax Plans of 6 Presidential Candidates on ThinkAdvisor.


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