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Understanding the Alternative Minimum Tax (AMT)

When it comes to paying your taxes, the alternative minimum tax sets a limit on how much you can deduct. Find out how it works.

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Let's see if we can shed some light on the alternative minimum tax which is also one of the most confusing aspects of taxation in the U.S., but hopefully this video will clarify things a little bit. So let's go back to that example from the first video of the person making $100,000, and what I'm going to do is I'm going to calculate the AMT, the Alternative Minimum Tax for that person, and then we're going to see what happens from there.

So alternative minimum tax for someone making $100,000, so what I've drawn right over here, this applies if you make less than $300,000. The first $47,000 or so is exempt when you're calculating the alternative minimum tax, so, for this person making $100,000, we're just going to have to consider the balance above $47,450, so 100,000 minus 47,450 would be what? It would be 52,000. So this amount right over here is going to be 52,000 and then 550. 52,550 if I did my math correct. So that's 100,000 minus 47,450.

And what the alternative minimum tax says is whatever you are above this exemption, above this 47,450 exemption, you're just going to pay a flat 26% on that amount, and if this person had made over 175,000, it would have been a flat 28%, but let's not go there. It just complicates things, and these things can get arbitrarily complicated. And if the person made over 300,000, they would have to use a 28%, and this zero, this exemption would disappear, but once again, let's not over-complicate it. Let's just focus on this person.

So this person has to pay 26% of 52,550 which would be, so it is 0.26 times 52,550 gives 13,663. So 13,663, that is equal to 52,550 times 26%, so this would be the alternative minimum tax calculation, this 13,000. You're like, "Hey, that's not so bad. Do I pay this above and beyond the 21,000 that we calculated in the first video? How does this work out?" and the answer is no. The IRS or your accountant would look at both of these numbers, and you would pay the higher of the two, so in this situation, your regular taxes are higher than your alternative minimum tax, so you would just pay your regular taxes. 

Now, this does come into play in situations. Well, one, if someone is making a ton of money, the AMT is probably going to be the larger number, but it in general will be the larger number if this person has a lot of deductions. So let's say they made $100,000 but they were able to take 10 grand off because they have mortgage interest that they can deduct, maybe they have all sorts of other crazy deductions, so that their actual reported income to the IRS becomes, I don't know, well maybe it becomes nothing. Maybe they're able to deduct everything so that with the regular taxations, it goes down, the reported income.

When I say deductions, remember, I'm not deducting taxes. I'm reporting income, so they're able to keep taking things off of this until eventually, well, I won't say nothing.  Maybe the reported income becomes $8,350, in which case the regular taxes would only be $835, and in this situation, they would have to pay the 13,663, and that's the whole point of the AMT is because you have this situation where people had all these deductions and were able to get out of paying taxes even though their income was pretty high, so they had this alternate calculation to just make sure that people do pay some taxes.

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