One tax that President Donald Trump has promised to put on the chopping block is one that hit him hard in 2005: the alternative minimum tax.
A copy of the president’s tax return recently revealed by MSNBC indicates that the alternative minimum tax cost Trump $US31 million. According to Business Insider’s Jim Edwards that “accounted for most of the $US38.5 million in taxes” the president paid in 2005.
What is the alternative minimum tax?
The original purpose of the AMT was to prevent very wealthy Americans from using deductions and loopholes to skimp on their taxes.
One way to look at it is as a secondary tax code. The AMT has a set of rates and rules that are distinct from the regular tax code and apply to certain high-income earners, trusts, estates and corporations.
So when corporations or individuals fall under the auspices of the AMT, their tax bill is figured out differently from ordinary taxpayers.
According to Bankrate’s Kay Bell, “Basically, it’s the difference between your regular tax bill, figured using ordinary income tax rates, and your AMT bill, figured by filling out more IRS paperwork. When there’s a difference, you must pay that amount, the AMT, in addition to your regular tax.”
The point of the AMT is to make sure wealthy Americans who earn above a certain amount pay a flat minimum tax rate (hence the name) even if they could get away with paying zero or very little taxes in the regular system. But many opponents of the tax say it now targets people in the upper-middle class, not the uber rich.
Here’s the history
The origins of the alternative minimum tax can be traced back to the late 1960s. The Department of the Treasury revealed that roughly 150 people legally paid zero federal income tax in 1966 by claiming “deductions and not including certain kinds of income.” Naturally taxpayers of modest means were very ticked-off about this.
According to Forbes, the US Congress actually received more complaints about those “tax-dodgers” than they did about the Vietnam War. So they responded by enacting the minimum tax, the alternative tax’s predecessor, in 1969. The current version of the alternative minimum tax was implemented in 1982. Since then its received a number of face lifts and touch-ups.
Today, however, the alternative minimum tax, doesn’t apply to super-rich Americans as it was originally intended. Since the AMT wasn’t indexed for inflation until 2013, the number of people who fall under the AMT umbrella has increased significantly since the 1970s and includes “30 per cent of households with cash income between $US200,000 and $US500,000, according to the Urban-Brookings Tax Policy Center.” In total, it applied to 3% of all taxpayers in 2005, according to data from the IRS.
Why some people think its a good idea to repeal or replace it
Most critics of the AMT oppose the tax because it doesn’t target the people and organisations it was originally aimed at.
“It was originally targeted at the super-wealthy when it came out, but the super-wealthy in most cases don’t pay it,” said certified public accountant Scott M. Aber in an interview with CNBC on December 9 2016.
Daniel Shaviro is a professor at the NYU School of Law. And he knows a thing or two about the AMT. He played a role in changing the tax in the 1980s.
He told Business Insider that the law in its current form doesn’t work.
“The current AMT doesn’t address [today’s] tax avoidance methods” he said.
“It does not address sophisticated modern tax avoidance techniques — such as Larry Ellison (who is worth $US50 billion) getting a $US1 salary and borrowing against the value of his appreciated stock, or companies such as Apple directing their global profits to tax haven subsidiaries,” Shaviro added.
The president says he’ll make up for that cost by reducing the number of deductions in the tax code.