What is the Alternative Minimum Tax (AMT) System?
The AMT is a peculiar concept. To put it simply, the AMT exists because some higher income taxpayers were not paying enough in taxes. Prior to the AMT system it was possible to invest money in such a way that deductions exceeded income. To alleviate this problem, a new top-to-bottom method of computing taxes was set up, the AMT system. A number of deductions, called “preferences”, were either disallowed or reduced and different tax rates were established. In theory, you compute your taxes under both the regular method and the AMT method and pay the higher amount. In practice, for most people, the regular tax is significantly higher than the AMT. One little irony about the AMT is that it comes close to being the flat tax that politicians have been talking about for years. If you look at the AMT alone, there are few deductions and two basic tax rates, 26 and 28 percent.
