ATM… What is it?

 Alternative Minimum Tax:

AMT is an alternative set of rules used to determine tax liability. It first came into existence as part of the Tax Reform Act of 1969. It was designed to target the rich. Lawmakers who introduced the concept cited a Washington Post article which reported that in 1967, 155 individuals with incomes over $200,000 did not pay any federal income taxes, and that 20 of these individuals were millionaires. The reason why they paid zero tax was because they used legal tax loopholes to eliminate their tax. AMT was designed to close tax loopholes by imposing an “alternative” set of rules. If this “alternative” way of calculating tax results in a higher tax then regular tax must be increased by AMT.

Why does AMT threaten the middle class? $200,000 in 1967 equals $1,200,550 in 2006, as adjusted for inflation. If AMT rules had stuck to their original purpose, they would only affect people who make in excess of $1.2 million. Most tax rules are adjusted for inflation on an annual basis. AMT, however, is not automatically adjusted for inflation. Congress must pass new legislation each time they want to adjust AMT to reflect inflation.

For many individuals AMT is the closest thing to a flat tax without Congress calling it “the flat tax”. Many deductions that would normally reduce an individuals federal income tax become adjustments or add-backs to calculate AMT. In essence, these add-backs are disallowed deductions in determining AMT. The two most common adjustments for middle class taxpayers in determining AMT are Taxes from Schedule A (state & local income taxes, real estate taxes, & sales taxes), Miscellaneous Deductions from Schedule A (notably: employee business expenses).