Alternative Minimum Tax

Running parallel to the regular tax code, the AMT is a separate set of rules under which some households must calculate their tax liability a second time. It has a larger exemption than the regular tax code, but at the same time it has fewer tax preferences; this design allows it to capture more income tax from households that would otherwise claim large deductions and have less tax liability. 

The original role of the Alternative Minimum Tax, introduced in 1969, was to prevent a small group of high-income taxpayers from combining so many deductions and exemptions that they owed little or no income tax.

The AMT identifies taxpayers who have taken “excessive” advantage of legal tax breaks and forces them to re-calculate their income tax. They must add back in some of the previously untaxed income, take a special AMT exemption and pay tax on this new definition of taxable income at different rates.

In theory, the AMT serves as a tax backstop, taxing income that would have escaped taxation. Recently there have been calls for AMT reform, but the key to reforming it lies in the regular tax code: curtailing the myriad exclusions, deductions, exemptions, and credits in the code would make it possible to expand the tax base and raise the same revenue with lower tax rates.

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