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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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# AMT overview

Overview of what the Alternative Minimum Tax is and its purpose. Created by Sal Khan.

## Want to join the conversation?

- So capital gains are exempt from the AMT then? Warren Buffet etc. are not pay close to 26-28% on their income.(19 votes)
- Exactly. The shift to capital gains income has meant that the richest banks and corporations make most of their money with the very low 15% tax rate, and they can write that down in various ways, or offshore the stock trading to avoid taxes and pay nothing.

AMT was mainly for the days when capital gains weren't this absurd, we really should make the capital gains counted as income, so that they are included here.(24 votes)

- I heard the AMT was originally passed to catch about 200 income earners paying low taxes. Is that true?(15 votes)
- It was enacted to go after 155 families, it now affects millions.

http://taxfoundation.org/article/fixing-alternative-minimum-tax(19 votes)

- Why not solve the problem of high income individuals "deducting their way down to a very low income tax" by having everyone fairly just pay one flat tax...it could be debated as to where to set that number at, but how about 20%?(9 votes)
- For this question assume the poor family earns $10,000 a year and the richer family earns $100,000 a year. A flat tax is a proportional tax which hits poorer people much harder than a progressive tax--so that if the government needs $11,000 to function and I use a flat tax of 10%, then the poor family will have to pay a full $1,000 of its income, whereas if we use a progressive tax we might get the poor family paying $500--or 5%--and the rich family paying the needed 10,500--or 10.5% of its income--no great hardship for the rich family. By the same reasoning, a sales tax is especially unfair in that poor families have their entire income exposed to this tax, whereas rich families can hide a large part of their income in capital gains--so that the poor families end up paying a higher %.(5 votes)

- What if person B reduced their taxable income via tax credits (rather than tax deductions as in the video)? Would person B still have to pay their AMT if their "regular taxes" were lower?(8 votes)
- Is there an AMT for businesses?(5 votes)
- How do deductions make the amount of regular taxes less on any income gained?(3 votes)
- You are not being taxed on those deductions. So, if you, for instance are in the 35% tax bracket, you don't have to pay the 35% of what is being deducted.(4 votes)

- how did you get the 94,500 for the atm(2 votes)
- It's 26% X $175,000 plus 28% of $175,000.

Here's the math:

175000 X .26 = 45,500

175000 X .28 = 49,000 Total is $94,500(3 votes)

- Sal don't you think it would be better to tax people using a quadratic formula to measure the person's tax increase in proportion to their increase in income? Just sub in the the income you made for that year into the formula, thereby giving you the amount of tax you owe.(1 vote)
- Well to be more specific, half of an inverse quadratic function. Also you can easily stretch/compress the function and have it cap off at a certain %.(4 votes)

- Can I consider the AMT "Tax Floor Level" which a person mustn't pay below ? Is AMT employed to prevent people from avoiding paying the higher amount of tax that they're supposed to pay ?(2 votes)
- The AMT is used to avoid allowing a person from paying an amount of taxes that is lower than the Alternative Minimum Tax (AMT). If the "regular tax payment" is an amount higher than the AMT, the person has to pay that higher amount. In other words, the AMT is the least of amount of taxes you have to pay but you may have to pay more than the AMT.(2 votes)

- If you are person B and you pay the $70000 in taxes, what happens? Does the government inform you that you have to pay the additional $24000, and, if so, how do they contact you? Just curious.(2 votes)
- Your return will show 94000 due and your check will be for only 70000, so you will hear from them quite soon that you owe them more money, and you will have to pay interest and penalties.(2 votes)

## Video transcript

Voiceover: Let's say we have
2 people in identical jobs. Person A and Person B. This past year, they both got paid in their identical jobs, they got paid $350,000 in salary. Now let's assume that
Person A has no deductions. They just calculate their taxes, and for the sake of simplicity, I'm just going to make up a number. I'm not going to go through all of it, especially because the tax
code changes every year. Let's just say their
regular taxes are $150,000. 150,000 in regular taxes. Regular taxes, when you just file taxes, not the straightforward,
but just the regular way. Let's say Person B, on the other hand, even though they have the exact same job, they donate a bunch to charity; they have all of these deductions; they have all of these things that they can write off from their income, and so Person B's taxable income, let's say that it goes down, with all of these deductions, the taxable income goes down to $200,000. On that taxable income of $200,000, Person B has to pay
$70,000 in regular taxes. Once again, I'm just
making up simple numbers, just for the sake of simplicity. I'm just actually figuring out exactly what Person B's taxes are. 70,000 in regular taxes. Now, the US government, or the IRS, says, "Hey, look; Person B
actually made a lot of money; "made a similar amount
of money to Person A; "they did all of these deductions; "allowed them to pay a lot less in taxes. "We don't necessarily like that. "This person's making a lot of money. "We think that they should "pay some alternative minimum tax." The way that's calculated
is, for either party, there's this completely separate tax code. So, Alternative Minimum Tax. You calculate your regular taxes, so that's this number and this number, and then in parallel you calculate an alternative minimum tax, and in the case of either of these people, what happens is you don't get most of these deductions right here. That's really done, basically, for simplicity purposes, on your gross income, and it's a much simpler tax code. It's almost a flat tax. At the $350,000 level, you
get no standard deduction, and it's really, it's 26% right now, on the first 175,000, and then it is 28% on the next 175,000, if you're making this much money. You have a deduction if
you make less than that, and all the rest; I won't
go into the details, but the general idea is you calculate this for either party, and in either situation, the alternative minimum tax for either of these people is going to be $94,500. $94,500. This guy, Person A,
will calculate his AMT. He gets $94,500. He's like, "Well, my
regular taxes are $150,000, "so I pay the higher of the 2." He pays his regular taxes. This is just done, just to make sure that his AMT isn't higher. Person B, on the other hand, his regular taxes, after
all of this deductions, came out to $70,000, so
he has to pay the AMT, because the AMT is higher
than his regular taxes, so this is what he pays. The general idea, you
compute your regular taxes; you compute the AMT; 2 separate tax codes; you pay the higher of the 2, and the whole idea of this is to make sure that people
who have a certain income aren't able to deduct it all away, and pay a very, very low income tax.