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Alternative minimum tax

The basics of the alternative minimum tax. Created by Sal Khan.

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Video transcript

Let's see if we can shed some light on the Alternative Minimum Tax, which is also one of the most confusing aspects of taxation in the U.S., but hopefully this video will clarify things a little bit. So let's go back to that example from the first video of the person making $100,000 and what I'm going to do is I'm going to calculate the AMT, the Alternative Minimum Tax for that person then we're going to see what happens from there. So Alternative Minium Tax for someone making $100,000, so what I've drawn right over here, this applies if you make less than $300,000. The first 47,000 or so is exempt when you're calculating the Alternative Minimum Tax. So for this person making $100,000, we're just going to have to consider the balance above 47,450. So 100,000 - 47,450, would be what? It would be 50 ... It would be 52,000 ... Let's see, this would be ... So this amount right over here is going to be 52,000 and then 6 or 550 ... 52,550, if I did my math correct. That's 100,000 - 47,450 and what the Alternative Minimum Tax says is whatever you are above this exemption, above this 47,450 exemption, you're just going to pay a flat 26% on that amount and if this person had made over 175,000, it would have been a flat 28%, but let's not go there, just complicates things and these things can get arbitrarily complicated. And if the person made over 300,000, they would have to use the 28% and this 0, this exemption would disappear, but once again, let's not over complicate it. Let's just focus on this person. So this person has to pay 26% of 52,550 which would be ... So it is .26 x 52,550 gives 13,663. So 13,663. That is equal to 52,550 x 26%. So this would be the Alternative ... Alternative Minimum Tax calculation, this 13,000. You're like, "Okay, that's not so bad." "Do I pay this above and beyond the 21,000" "that we calculated in the first video?" "You know, how does this work out?", and the answer is no. You ... The IRS or your accountant would look at both of these numbers and you would pay the higher of the two. So in this situation, your regular taxes are higher than your Alerternative Minimum Tax, so you would just pay your regular taxes. Now this does come into play in situations where 1) if someone is making a ton of money, the AMT is probably going to be the larger number, but in general it would be the larger number if this person has a lot of deductions. So let's say they made $100,000, but they're able to take ten grand off because they have ... They have mortgage interest that they can deduct, so maybe they have all sorts of other crazy deductions. So that their actual reported income to the IRS becomes, I don't know, well maybe it becomes nothing. Maybe they're able to deduct everything. So that with the regular taxations, it goes down ... the reported income. When I say deductions, remember, I'm not deducting taxes, I'm reporting income. So they're able to keep taking things off of this until eventually ... Well, I won't say nothing, maybe their reported income becomes $8,350. In which case, the regular taxes would only be $835. And in this situation, they would have to pay the 13,663 and that's the whole point of the AMT is because you had the situation where people had all these deductions and were able to get out of paying taxes even though their income was pretty high, so they had this alternate calculation to just make sure that people do pay some taxes.