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Stan Veliotis exposes regular tax rate schedule as implied tax preference

Stan Veliotis, associate professor and director of the Center for Professional Accounting Practices, recently published “AMT With No or Trivial Transactional Tax Preferences: The Regular Tax Rate Schedule as an Implied Preference” in the spring 2016 volume of The Tax Lawyer, the peer-reviewed journal of the tax section of the American Bar Association.

In recent decades, the alternative minimum tax (AMT) under the U.S. federal income tax rules has been charged to more and more taxpayers, and currently reaches millions of taxpayers, up from the couple of hundred taxpayers captured by AMT when it was first enacted several decades ago. This article calls attention to and explains the surprising result that AMT may apply to taxpayers with no transactional preferences and applies to many taxpayers with even a trivial amount of preferences. 

AMT was designed to ensure that taxpayers who enjoy a large number of tax-preferences (certain exclusions, deductions, and credits) pay a minimum amount of tax on their income.  Enacted in 1969 to address the concern that wealthy taxpayers were paying far less income tax than considered fair, Congress specifically identified certain tax deductions, credits, and income exclusions (referred to in the article as “explicit tax preferences”) for disallowance in the AMT regime. For example, if a taxpayer had extensive private activity municipal bond interest income, which is excluded from taxable income under the regular tax rules, that person might be subjected to AMT. However, many taxpayers began to find themselves subject to AMT even if they did not have relatively large explicit preferences.

To investigate why this surprising result occurs under the AMT regime, this article distinguishes explicit tax preferences from “transactional tax preferences,” which the article defines as the set of all explicit tax preferences other than the standard deduction and the taxpayer’s own personal exemption. The article demonstrates the surprising result that, for head-of-household taxpayers within a certain income level range, the taxpayer can be subject to AMT even if there are no transactional tax preferences (i.e., no excluded income, no credits or deductions for expenditures, and no dependency or spousal exemptions). This exposes one reason why many taxpayers are subjected to AMT: the regular tax rate schedule has become an implicit tax preference!

The article investigates multiple examples of taxpayers with various filling status and no explicit and/or transactional preferences. It shows that even when AMT might not apply, many taxpayers are precipitously close to entering AMT with a relatively trivial amount of transactional or other explicit preferences. The article also offers several suggestions and potential solutions to remedy this unusual result of a taxpayer paying AMT with no transactional preferences, as well as the risk of subjecting many other taxpayers to AMT with relatively trivial transactional or other explicit preferences.