Surving on Minimum Wage With a Family of 3 in Nyc
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In 1969, information technology came to the attending of the federal government and the public that there were 155 tax return filers with incomes of $200,000 — equivalent to an almanac income of more than than $1.3 million in today's dollars — who paid no federal income tax.
While their $0 tax liability was legal within the tax code at the time — they were using federally immune income deductions and tax breaks appropriately — the government was embarrassed and moved quickly to legislate a solution. From this, the AMT, or Alternative Minimum Revenue enhancement, was created, with the aim of making the tax system fairer.
What is the Alternative Minimum Taxation?
The alternative minimum tax mandates that many taxpayers must calculate their taxes owed past using an "alternative method" as well as the traditional method — and pay the higher of the two tax amounts calculated.
While the revenue enhancement cuts of the Reagan era eliminated about of the original deductions that led to its creation, the AMT has remained intact to this day. The AMT got a massive revamp in 2017 thank you to the Tax Cuts and Jobs Act. Before, those who were well off were impacted the the AMT, but non necessarily those in the highest income brackets.
Today, the AMT just impacts the highest earners – or well-nigh 0.one% of total U.South. households in 2019. The rates are uncomplicated- either 26% or 28% depending on your income and filing status.
How Does the AMT Work?
The AMT is an alternative fix of rules for calculating your federal income taxation. The rules make up one's mind the minimum amount of revenue enhancement your income requires you to pay. If you lot're already paying at least that much because of the regular income tax, yous don't have to pay AMT. But if your regular tax falls below the minimum, you have to pay the higher AMT amount.
The AMT takes away certain breaks allowed by the regular income tax organization. Under AMT, these tax deductions are eliminated:
- Your regular personal exemption;
- Dependent exemptions;
- Deductions for state and local taxes paid;
- Deductions for habitation equity loans unless used to improve your principal residence; and
- Foreign tax credits.
Basically, many of the deductions that you tin can merits to figure out your regular taxation bill must be added dorsum. In one case yous add back in these disallowed credits and run the numbers, you might exist subject to a bigger IRS bill if your taxable income exceeds the annual AMT exemption amount for your filing status.
If your income is above the AMT exemption then the culling minimum tax is usually triggered- pregnant you need to calculate your taxes twice. In one case under regular tax rules and then under the AMT dominion and pay the higher amount owed.
| Filing Status | AMT Exemption Amount for 2020 |
|---|---|
| Single Individuals | $72,900 |
| Married Filing Jointly | $113,400 |
AMT exceptions also phase out later a certain amount. In 2020, the exemption phases out at $518,400 for single filers and $1,036,800 for married taxpayers filing jointly.
How Do Y'all Know If Y'all Need To Pay AMT?
Unfortunately, there's no piece of cake way to figure out if you'll be subject area to paying the AMT. Anybody'southward revenue enhancement state of affairs is different and what goes into the calculations is uniquely personal. To complicate things, there'due south no specific income threshold at which the AMT kicks in.
A good place to offset is checking on the IRS website. You can besides go a good handle on whether you'll be subject to AMT or non by using tax-planning software such every bit TurboTax or TaxSlayer to run projections and monitor your tax liability. Or you can hire a tax accountant to run projections for you.
Some other mode to estimate if you lot are close to getting hit with the AMT is to calculate last yr's taxes using Form 6251 and see where your income will fall in relation to them this twelvemonth.
Lesser Line
As a taxpayer, you are required to effigy out if you lot owe whatsoever additional tax under the Alternative Minimum Tax system past completing IRS Form 6251. If the tax calculated on Form 6251 is higher than that calculated on your regular tax return, yous have to pay the departure equally AMT — in addition to your regularly calculated income tax.
If the calculations bear witness you lot must pay the AMT, paying the extra corporeality combined with the extra paperwork hassle is not fun. Simply it's amend than dealing with the IRS if an audit shows that you lot should have paid and did not. The IRS charges involvement on unpaid taxes and assesses penalties.
To learn more about how taxes work and how you can minimize your taxes, check out Cofield's Concepts, an educational site from financial counselor Carter Cofield. In his tax class, you'll larn everything you lot need to know near how to take advantage of deductions and how taxes on investments work.
Further Reading: Our Cofield'due south Concepts review
Source: https://investorjunkie.com/economics/minimum-wage-living-wage/
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