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Why it is Vital to Understand the Alternative Minimum Tax vs. the Standard Tax System

The tax system is designed to provide state benefits to citizens. However, in the ultimate analysis, it is a deduction from the money that people earn. If you are earning money, almost all types of taxes will affect you directly or indirectly. That is why having accurate information about the country’s tax system is necessary so that you will know for sure which tax bracket you fall under.

Although all income earners know about the standard tax system, it is the alternative minimum tax that leaves most people clueless. Read this article further to understand the difference between the standard tax system and the alternative minimum tax (AMT). Most importantly, you will learn how these different tax forms affect your personal wealth.

What is the Alternative Minimum Tax?

There was a time when wealthy individuals in America left no stone unturned to find loopholes in the laws, only to avoid paying taxes. Hence, in 1969, the roots of AMT were planted to put a full stop to this behavior. The tax itself was officially implemented in 1982, which charged a minimum tax from wealthy people, eliminating many deductions and exemptions that were found in the standard system.

How is it Different from the Standard Tax System?

One difference is already mentioned, i.e. the alternate AMT disallows various exemptions and deductions like the local income tax as compared to the standard system. Another difference is how the stock options are treated. If you opt to purchase stock at lower prices under the AMT, the money that you save is considered an income. Read again if you did not understand.

Since that money is considered your income, you will be taxed for it. However, you are not earning that money in reality, which means that you are paying more taxes on income that you did not even earn in reality! Finally, depreciation is also charged differently under the AMT system.

In the standard tax system, accelerated depreciation is used where the depreciation charge decreases over the years (highest in the first year, lowest in the last). However, under AMT, the depreciation charge remains constant throughout the life of your asset.

The Weakness of the AMT

The AMT was targeted towards the 155 or so wealthy families back in the 1960s to force them to pay a minimum tax on their income. However, AMT does not take inflation into account. That is why the same tax is charged on people who fall under the same income bracket. So if initially the AMT was levied on $75000-100000, it will also be levied on people who earn the same income today, even if they do not evade taxes!

This means that even middle-class employees have to pay the AMT if they earn that kind of money. This is the reason why most call AMT the tax that affects all the people that it was NOT supposed to affect!

Tax Exemptions and Reducing your Liability

Exemptions in this tax include:

  • · $48450 for single taxpayers
  • · $74, 450 for taxpayers with a family
  • · $37,225 for married couple filing individually
  • · $ 6,800 for a child paying at the parent’s rate

Many people do not prepare for tax on their children’s possession, including expensive gifts or investments that are subject to inherit tax etc.

You can lower your liabilities if you have the following benefits:

  • · Dependents
  • · Elderly care
  • · Mortgage interest
  • · College

How does AMT affect you?

If you have been following the information thus far, you will have recognized how AMT affects your income. Higher tax rates will result in lower disposable income. More of your income will be sucked out by taxes, and as mentioned before, taxes on income that you do not earn! You will find difficulty paying out other bills, like your credit card installments. You can possibly fall in debt, and you would require credit card debt help.

That is why it is recommended that along with credit card debt help, you should also consult a reliable tax planner. He/she will effectively guide you through the complexities of the AMT, and they will also find some possible exemptions for you, thereby reducing your tax liabilities.

About the Author:

The above article is written and edited by Eva K, who is a freelance writer for various blogs and communities related to finance and business. In her free time she writes articles related to credit card debt help , stocks, economy, debt helpand anything that is related to them.

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