What is the AMT?

Published November 1, 2003

The alternative minimum tax (AMT) is an extra tax system for individuals, joint filers, partnerships, and corporations deemed by the federal government to have too many deductions or credits. Those reporting income of more than $75,000 a year are advised to fill out Form 6251 to check for possible AMT obligations. The AMT is an extremely costly, sometimes confusing, and very inefficient tax.

A Complicated Tax

The best way to understand the AMT is to view it as a separate tax system. It has its own set of tax rates and its own rules for deductions. It is less generous than the regular tax rules. The only way to tell if additional tax is owed is by filling out the forms (essentially a second time) or by being audited by the Internal Revenue Service (IRS). If it turns out more tax is owed based on the AMT calculations, additional taxes–plus any interest or penalty the IRS is legally allowed to charge– would be due from the taxpayer.

History of the AMT

The AMT has its roots in a minimum income tax enacted by Congress in 1969. At that time, 155 individuals with adjusted gross incomes of more than $200,000 had paid no income tax on their 1967 returns. The minimum tax was an “add on” of 10 percent of adjusted gross income. The number of individuals with adjusted gross incomes of more than $200,000 who paid no income tax rose to 244 taxpayers by 1974, so in 1976 Congress raised the minimum tax to 15 percent.

In 1978, Congress became concerned that the minimum tax was hampering capital formation. The minimum tax was thus changed to exclude capital gains, but the AMT was adopted to apply to capital gains for certain taxpayers.

Bottom Line

The compliance burden for the AMT can be high, and this tax is not known for either economic efficiency or tax fairness. While the AMT was originally intended to strike only the super-wealthy, it has now become known as the stealth tax: It sneaks up on many unsuspecting taxpayers. It is becoming one of the most dreaded (and complicated) provisions in the tax code.