This is one of a series of posts on Trump’s recent tax proposal. To see the entire collection of posts, click HERE.
What is the Alternative Minimum Tax?
The alternative minimum tax, or AMT, exists to keep very wealthy Americans from using deductions and loopholes to avoid paying taxes. If a taxpayer makes a certain amount of money and takes enough deductions to pay an extremely low tax rate, the AMT kicks in and forces them to recalculate their taxes using separate rules that result in a higher tax bill. Basically, the AMT exists to ensure that wealthy Americans have to pay at least a minimum tax rate regardless of their deductions.
Who is affected by the AMT?
4.7 million Americans of different income levels paid the AMT in 2016, although most were wealthy and all were at least upper-middle class. Some Americans who pay the AMT earn between $200 and $500 thousand a year, but it mostly affects Americans earning over $500 thousand per year. One notable payer of the AMT is our very own President Trump. His 2005 tax returns reveal that, because of the AMT, he paid a 25% tax rate on $153 million in taxable income, whereas without it he would have paid only 4%.
Why should you care?
President Trump’s personal experience reveals the importance of the AMT. There is no good reason someone earning $153 million a year should only pay a 4% tax rate. The alternative minimum tax ensures that the wealthiest Americans are not able to manipulate the tax system to avoid paying their fair share.
President Trump has promised to cut deductions in order to make up for the lost revenue from the AMT (estimated to be $412.8 billion over a decade), but details for which deductions he plans to eliminate have not been provided. It is telling that the only two he has publicly said he plans to keep are the mortgage interest deduction and the charitable contribution deduction, both of which are used much, much more often by the wealthy than by normal Americans.
At its core, eliminating the AMT is just another major tax cut for the wealthy that does nothing for working Americans.
For the next post in this series, click here to read about Trump’s plan to put in place a territorial tax system for US corporations operating internationally.