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Basics Of Alternative Minimum Tax

Referencing Styles : Harvard | Pages : 1
  • University: University of Windsor
  • Country: CA

Basics Of Alternative Minimum Tax:

The alternative minimum tax is regarded as the supplemented income tax that is imposed by the US federal government along with the baseline income tax for specific individuals, companies, estates and trusts that have exemptions or in certain situations it allows lower payment of standard income tax. Alternative Minimum Tax is applied at a close to flat rate based on the adjusted value of assessable income beyond certain threshold limit. This kind of exemption is substantially greater than the exemption from the regular income tax.

The regular amount of taxable income is adjusted for certain kind of items that are calculated differently for alternative minimum tax particularly the depreciation and medical expenditure. No deduction is permitted for state taxes or miscellaneous itemized deductions in calculating the alternative minimum tax income. Taxpayers that have income beyond the exemption limit whose regular federal income tax is lower than the sum of alternative minimum tax should pay higher amount of alternative minimum tax.

The alternative minimum tax was actually designed to impose tax on higher income taxpayers that used the regular tax system to pay the little amount of tax or no tax. Over the years, though inflation has resulted in the application of alternative minimum tax on the middle-income taxpayers.

Every year, higher income taxpayers should compute and then pay the higher amount of alternative minimum tax or the regular tax. The base for considering the tax is usually non-taxable income however income is subjected to different calculations. Taxes that are paid over the course of a tax year does not account for alternative minimum tax, given the AMT is higher than the regular tax, the taxpayer would be liable for additional tax.

The alternative minimum tax income above the exemption level stands 26% till the second threshold and afterward stands 28%. Furthermore, above yet greater than thresholds, the exemption from the alternative minimum tax is lost. While at another threshold, the greater amount of tax rate starts to substitute the lower tax rates. Very high income earners are imposed tax at 28% of their overall income while a lower tax rate is applicable to the long term capital gains.

For income that are inside the exemption phase-out marginal tax rates are applicable effectively multiplied by 1.25 that changes from 20% to 25%, changes from 26% to 32.5% and changes from 28% to 35%. Additionally, companies that have average yearly gross receipts of $7,500,000 or less for last three years are given exemption from AMT but only as long as they continue to meet this test. Furthermore, a company is usually exempted from the AMT in the first year of its operation as the corporation. Affiliated companies are considered as if they are single company for all three years of its exemption.

No deduction is permitted for personal exemption nor any standard deduction is allowed. State, local and foreign taxes are not permitted for deduction. Nevertheless, majority of other itemized deduction is applied in parts while significant other adjustments to income and deduction is applicable.          

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