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Current time:0:00Total duration:3:45

Video transcript

let's say we have two people and identical jobs person a and person B and this past year they both got paid and they're identical jobs they got paid three hundred fifty thousand dollars in salary now let's assume that person a has no deduction so 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 of it and especially because the tax code changes every year let's just say their regular taxes are one hundred and fifty thousand dollars one hundred and fifty thousand in regular taxes regular taxes when you just file taxes the straight will 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 two hundred thousand dollars and on that taxable income of $200,000 person B has to pay seventy thousand dollars in regular taxes and once again I'm just making up simple numbers just so that just for the sake of simplicity I'm not actually figuring out exactly what person B's taxes are seventy thousand 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 a lot less in taxes we don't necessarily like that this person is making a lot of money we think that they should pay some alternative minimum tax and the way that's calculated is for either party there's this completely separate tax code so alternative minimum tax and so you calculate your regular taxes so that's this number and this number and then in parallel you calculate in an alternative minimum tax and in the case of either of these people what happens is is that you don't get most of these deductions right here that's really done basically for simplicity purposes on you are 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 percent right now on the first 175,000 and then it is 28 percent on the next 175,000 if you're making this much money it's a little you have a deduction if you make less than that and all the rest I won't go to 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 ninety four thousand five hundred dollars ninety four thousand five hundred dollars so this guy person a will calculate his AMT he gets ninety four thousand five hundred dollars he's like well my regular taxes are 150 thousand dollars so I pay the higher of the two 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 these deductions came out to seventy thousand dollars so he has to pay the AMT because the AMT is higher than his regular taxes so this is what he pays so the general idea you compute your regular taxes you compute the AMT two separate tax codes you pay the higher of the two 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