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AMT overview

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

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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.