Alternative Minimum Tax

Lesson

The Alternative Minimum Tax (AMT) is a parallel tax system designed to ensure that high-income individuals pay a minimum amount of tax, regardless of deductions and credits. It was established to prevent taxpayers from using loopholes to avoid paying taxes.

Practice Question #1

Which of the following is NOT a tax preference item for AMT purposes?

A) Excess depreciation on real property

B) Private activity bond interest

C) Charitable contributions

D) Incentive stock option income

Select an option above to see an explanation here.

A) Excess depreciation on real property is a tax preference item for AMT purposes. B) Private activity bond interest is a tax preference item for AMT purposes. C) Charitable contributions are not tax preference items for AMT purposes. D) Incentive stock option income is a tax preference item for AMT purposes.

Terms

Alternative Minimum Tax (AMT):: A parallel tax system designed to ensure high-income individuals pay a minimum amount of tax.

Practice Question #2

What is the purpose of the Alternative Minimum Tax (AMT)?

A) To provide additional tax credits for low-income individuals

B) To ensure high-income individuals pay a minimum amount of tax

C) To simplify the tax filing process

D) To eliminate the need for itemized deductions

Select an option above to see an explanation here.

A) The AMT does not provide additional tax credits for low-income individuals. B) The AMT ensures that high-income individuals pay a minimum amount of tax. C) The AMT does not simplify the tax filing process. D) The AMT does not eliminate the need for itemized deductions.

Do Not Confuse With

Regular Tax:: The standard income tax system, which is separate from the AMT system.

Practice Question #3

What is the primary purpose of the Alternative Minimum Tax (AMT)?

A) To ensure that high-income individuals pay a minimum amount of tax

B) To provide tax relief for low-income individuals

C) To simplify the tax code

D) To eliminate tax deductions for certain expenses

Select an option above to see an explanation here.

A) The primary purpose of the AMT is to ensure that high-income individuals pay a minimum amount of tax, regardless of deductions and credits. B) The AMT does not provide tax relief for low-income individuals. C) The AMT does not simplify the tax code; in fact, it adds complexity. D) While the AMT does eliminate some tax deductions, its primary purpose is to ensure that high-income individuals pay a minimum amount of tax.

Historical Example

In the 1960s, it was discovered that some high-income individuals were using tax loopholes to avoid paying any federal income tax. In response, Congress enacted the AMT in 1969 to ensure that these individuals paid a minimum amount of tax.