How the Alternative Minimum Tax Works

Who Pays the Alternative Minimum Tax?

You'd be surprised at who has to pay the alternative minimum tax. In fact, you may have to pay it.
You'd be surprised at who has to pay the alternative minimum tax. In fact, you may have to pay it.
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In 1969, when the first "minimum" tax was created, it was designed to limit the exemptions and deductions that wealthy people were using to lower their tax bill to zero. Those included tax credits for people who had invested in oil wells -- not your average middle-class family [source: Johnston]. But in 1986, Congress significantly changed the focus of the AMT. As part of the Tax Reform Act of 1986, a slew of more common exemptions were thrown out of AMT calculations, including the standard deduction, the personal exemption, and deductions for state and local taxes.

The effect of these changes was that a new kind of taxpayer was now targeted by the AMT. This new group, some of whom are middle- to upper-middle class, share some common characteristics:

In 1987, a year after the AMT was altered, only one-tenth of one percent of tax returns were required to pay the AMT. By 2010, those numbers had skyrocketed. Sixty-four percent of taxpayers in the $200,000 to $500,000 tax bracket paid the AMT in 2010 and 35.6 percent of taxpayers earning between $100,000 and $200,000. But most surprising is that 29.3 percent of taxpayers earning between $75,000 and $100,000 were also required to pay the AMT [source:TurboTax].

Analyze those numbers further and some interesting trends emerge. Forty-four percent of families with two or more children paid the AMT in 2010 compared with only 17 percent of those without children, and married couples were 12 times as likely to pay the AMT as single filers. Also, residents in high-tax states are three times more likely to owe the AMT than residents of low-tax states [source: Burman et al]. This underlines the effect that personal exemptions, the standard deduction and state and local tax deductions have on inflating the number of AMT filers.

But perhaps the biggest criticism of the AMT -- and the reason it affects a growing number of taxpayers -- is that AMT exemption levels haven't been adjusted for inflation since 1969 [source: H&R Block]. The regular income tax brackets are adjusted for inflation annually, so that you aren't punished for earning a little more money each year to keep up with the rising cost of living. Not so for the AMT. Although Congress frequently passes temporary "patches" to bump up the exemption levels of the AMT, they haven't kept pace with inflation, meaning that more and more "lower" income earners get sucked into the system.

It's important to note, however, that high-income earners still pay the most money in AMT. Only 11 percent of the total AMT revenue in 2010 came from taxpayers earning less than $100,000. The largest contributors where those earning between $200,000 and $500,000, who paid 39 percent of all AMT. Ironically, a lower percentage of millionaires paid the AMT in 2010 than folks earning between $200,000 and $500,000 [source:Stewart]. So much for the rich folks' tax.

On the next page, we'll share some tips for how to avoid the AMT.