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## Finance and capital markets

### Course: Finance and capital markets > Unit 4

Lesson 1: Personal taxes- Basics of US income tax rate schedule
- Tax deductions introduction
- AMT overview
- Alternative minimum tax
- Estate tax introduction
- Tax brackets and progressive taxation
- Calculating state taxes and take home pay
- Marriage penalty
- Married taxes clarification

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# Alternative minimum tax

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

## Want to join the conversation?

- This is not an accurate example of how to calculate the AMT as it stands today. First of all for 2012 the filing single exception is $48,450. This does not mention the differences in exemption for married filing jointly and married filing separately, being $74,450 and $37,225 respectively. It also fails to mention that the exemption is reduced by 25% for each dollar over certain amounts; $$150,000 for joint filers and & $112,500 for singles ( this is a major part of the AMT for high income individuals). It also fails to mention that the 26% rate is only applied to the first $175,000 of the tax base with the excess being taxed at the 28% rate. These facts are crucial on calculating the AMT for high income individuals and should not be left out.(0 votes)
- He explained AMT in under four minutes, I think we can forgive him if it is a little oversimplified.(85 votes)

- Any tax practitioners here willing to explain how offshore tax havens are used to avoid tax?(3 votes)
- Because, accounts in other countries might have lower tax rates, so you can pay lower tax rates by storing your money abroad.(7 votes)

- What's the difference between deductions and tax credits?(3 votes)
- Deduction is taken out of your income where as tax credits is subtracted directly from your taxes. For example, lets say your income is 10,000 and your tax rate is 10%.

If I give you a deduction of 1000,

taxable income is (10,000 - 1000) = 9000

Taxes = 9000 x 10% = 900

Post tax income = 10,000 - 900 = 9100

On the other hand, If I gave you a tax credit of 1000, your taxable income would still be 10,000. So the taxes you pay would be:

Taxes: 10,000 x 10% = 1,000

Tax credit of 1,000 is taken directly out of your taxes, so you would pay 1,000 - 1,000

Your post-tax income would be 10,000

Of course in the real world the IRS is not that generous with tax credits. That's why tax deduction is a lot more common than tax credits. Another way to think about it is deductions are still affected by your tax rate, where as tax credits are not affected by tax rate. Hope that helps!(5 votes)

- i understand it but i dont get were u got 21720 dollars(2 votes)
- He calculated this exact number in the video ''basics of Us income tax rate schedule''.

https://www.khanacademy.org/economics-finance-domain/core-finance/taxes-topic/taxes/v/basics-of-us-income-tax-rate-schedule(3 votes)

- At minute0:36Sal says:
*"The first 47 thousand or so.... is exempt when you calculate the alternative minimum tax".*Does Sal refers that if one person earn less than this 47 thousand dollars per year, he/she is not required to pay the alternative minimum tax? If this is the case then that person only needs to pay his/her regular taxes, right?(3 votes) - why not exchange the AMT for the current complex tax code?(2 votes)
- That is slowly happening anyway, because of inflation. More and more people fall into AMT each year.(3 votes)

- Does the AMT apply just to individuals or is there also an AMT for businesses and other types of organizations?(2 votes)
- Just individuals.

Many corporations with huge profits pay zero tax(2 votes)

- Can all taxpayers use the 179 immediate expensing election on certain property?(2 votes)
- At what point of ones income does AMT have to be calculated? Up to the 42,450?(2 votes)
- What items push people in the minimum alternative tax?(2 votes)

## 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.