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The Alternative Minimum Tax Part 1: Why do we have it?

by Rebecca K. Wohltman, Associate

The Alternative Minimum Tax has been a part of America’s tax system for more than 40 years. Its purpose was to ensure that the wealthiest Americans paid at least a minimum amount of tax. Originally enacted due to less than 200 taxpayers, more than 4 million taxpayers paid $32 billion as a result of the Alternative Minimum Tax in 2012, the latest year for which IRS published data. This series of blogs will start with an explanation of the reason the Alternative Minimum Tax exists, how Congress continues to alter the tax and what it means for taxpayers today.

The Alternative Minimum Tax is a parallel to the traditional tax system. Later blogs will explain some of the differences, but it essentially moves the tax brackets, decreases some deductions, and disallows other deductions. As a result, taxpayers caught in the Alternative Minimum Tax’s reach pay a greater tax liability.

In 1966, 155 taxpayers with income in excess of $200,000 (more than $1.4 million in today’s dollar value), paid no federal income tax by using tax shelters, loopholes, and other tax planning tools. Burman, Gale, and Rohaly, 173. The American people were outraged and did not hesitate to tell their Congressmen. Congressmen received more letters from constituents regarding these 155 taxpayers than they did concerning the entire Vietnam War! Burman, Gale, and Rohaly 555.

In response, Congress enacted the first version of the Alternative Minimum Tax as part of the 1969 Tax Reform Act. It charged an additional 10% tax on income exceeding $30,000, with a deduction for regular income tax paid. Feenberg and Poterba, 407. In 1970, the first year the tax applied, 20,000 taxpayers paid the new minimum tax. Grumet, 7. The original Alternative Minimum Tax expired in 1981, but it is still applies today with few alterations. As such, the tax continues to apply to Americans who would not traditionally be considered wealthy. It may even apply to you.

From the initial 155 taxpayers to the more than 4 million today, the Alternative Minimum Tax continues to expand its reach. The Taxpayer Advocate Service has advocated for repealing the Alternative Minimum Tax for many years, but largely because of the revenue it generates, it appears that the Alternative Minimum Tax is here to stay. You may not be able to avoid it, but you can understand the basics of it.

For additional information regarding the Alternative Minimum Tax, contact the Belleville office of Mathis, Marifian & Richter, LTD.

Professional Services Disclaimer: Please note that the information presented here is as an educational service, and while it contains information about legal issues, it is not legal advice. No warranty is made regarding the applicability of the information presented to a particular client situation, and the information set forth is not a substitute for original legal research, analysis and drafting for a particular client situation.


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