In the current tax year, married couples filing jointly with income above $58,000 may be subject to AMT, though that figure, or exemption, is dropping to $45,000 next year unless new legislation is passed. The exemption is phased out for those with higher incomes, or $150,000 for married couples filing jointly.
The AMT was never intended for the masses: It's a parallel tax system that was installed in the late 1960s to ensure the wealthiest Americans were paying their fair share of taxes by reducing the amount of deductions they can take.
However, it was never indexed for inflation and has increasingly trapped more middle-class taxpayers. Indeed, both proposals to revamp the tax code announced last month by the Federal Tax Reform advisery panel recommended eliminating the AMT.
To determine AMT tax liability, two calculations are necessary: one under the traditional tax system and another under the AMT system, where various deductions — such as state and local income taxes, property taxes, miscellaneous deductions and personal exemptions and others — are added back. You must pay the greater of the two.
Though the AMT rate is either 26 percent or 28 percent — a lower rate than the highest marginal tax bracket of 35 percent — it's applied to a wider base of income, making that tax bill more costly. Also, unlike the traditional tax code, the AMT isn't a progressive tax, but rather a flat tax.
