Income tax in the United States is computed using two ways. One is the regular tax, and the other one is the Alternative Minimum Tax (AMT). Both were good to use until the year 2000, when several flaws were discovered in the AMT. Technology stock prices experienced a decline which caught the taxpayers in Silicon Valley off guard because under AMT rules, taxing on unrealized gains on incentive stock options is done on the date these options are put into effect. However, under the regular tax rules, until the actual stocks are sold, taxes on capital gains are not to be paid.
The AMT was intended to prevent individuals wanting to avoid having to pay tax from using the loopholes in the tax law. However, the issue of unrealized gains on incentive stock options impresses problems for those who are unable to produce cash to pay tax on gains that they are still unaware of. Because of this, the Congress has taken action to make modifications on the AMT concerning this issue.
Another flaw recognized is the fact that AMT has not been adjusted at the same rate as regular income taxes. In 2001, when the tax cut was passed, only the regular tax rates have been lessened. The AMT tax rates were still the same. As a result, many taxpayers were affected by the AMT, especially those with high deductions.
In addition, the AMT was originally introduced by the Congress in the year 1969 when it has been found out that 21 millionaires did not pay any income tax because of several deductions on their income tax returns. It was highly unlikely for millionaires to get tripped by the AMT because their immediate tax rates are already greater, when marginal rate of individuals with at least $1,000,000 dollars is 35% and only 26% rate is implemented by AMT on all income.
