History

• According to TurboTax, the AMT was instituted in 1969 because over 100 high income taxpayers were able to completely avoid income tax by taking a variety of tax breaks. In response, Congress created the AMT to force high income taxpayers to pay some tax, even if they make use of tax breaks. H&R Block states that Congress has not adjusted the AMT amount for inflation since its creation, meaning it has potential to affect more workers today than it did when it was created.
  
  

Function

• The AMT enables the IRS to tax high income taxpayers even if they would normally owe little or no taxes due to tax breaks. The AMT is essentially a second tax system that high income earners must use to calculate taxes. Taxpayers must use tax Form 6251 to calculate the AMT and if the AMT amount exceeds the normal income tax amount, they must pay the AMT amount instead.
  
  

Pros and Cons

• The AMT allows the U.S. government to raise more tax revenue and prevent high income earners from avoiding all tax through tax loopholes. The U.S. tax system is designed to tax low income earners less than high income earners and the AMT helps the system achieve this goal. On the other hand, since the ATM imposes higher taxes on certain individuals, it could potentially reduce economic activity. When people have less money to spend due to higher taxes, it can reduce consumption, investment and saving, which are keys to economic growth.
  
  

Considerations

• The IRS gives taxpayers exemptions from the AMT if their income falls below a certain threshold. TurboTax states single taxpayers earning less than $47,450 in 2010 and married taxpayers filing joint returns that make less than $72,450 are exempt from the AMT. These exemptions exist due to tax relief legislation passed under the Obama administration. If your income exceeds these amounts, you may have to fill out tax Form 6251 to see if you owe the AMT.