Skip to main content

It's featured in Trump's tax return, so what is alternative minimum tax?

Donald Trump paid more tax in 2005 because of the alternative minimum tax, so what is it?
  • Author:
  • Updated:
    Original:

In case you've been living under a rock in the past 24 hours, MSNBC's Rachel Maddow released two pages of President Donald Trump's 2005 tax return Tuesday evening.

Just before the release, the White House issued a statement confirming some of the details, including that Trump paid the IRS $38 million on an income of $150 million in 2005.

But a closer study of the return reveals that the effective 24.5 percent tax rate Trump paid in 2005 was the result of the alternative minimum tax (AMT) – a tax rule he wants to get rid of – and that without it his final tax bill would have been around $7 million, according to Business Insider.

What is alternative minimum tax?

The AMT was introduced by Congress in 1969 as a way to prevent the nation's wealthiest from legally using deductions, tax shelters and other tax breaks to pay next-to-nothing in federal income taxes, according to TurboTax. This came after 155 of the nation's richest earners were found to have paid zero income tax.

It excludes many of the deductions, tax credits and tax-free expenses you can claim with regular income tax – for example, state and local taxes are no longer deductible and you don't get a "marriage bonus." If at the end of the calculation your AMT is higher than what you'd pay in regular income tax, you pay the 26-28 percent AMT tax rate instead.

Before your AMT is calculated, you are given an exemption based on how you're filing, which is designed to ensure lower earners don't get caught in the tax.

If you're single and your overall income was $100,000, you can subtract $53,900 before AMT is calculated – meaning you're more likely to pay regular income tax. If you're married filing jointly, you can subtract $83,800.

According to CNBC, any household with an income of more than $75,000 claiming at least one deduction, or any household with a $150,000 income regardless of deductions, should at least check if they are eligible for the AMT.

Who pays it?

Despite the above exemptions and the AMT's initial aim of targeting the super rich, the Tax Policy Center says upper-middle income earners – particularly those with many children as there are no exemptions for dependents – tend to be the ones who pay the alternative tax.

In 2016, about 2.2 percent of AMT taxpayers in 2016 earned less than $200,000, 30.3 percent earned $200,000-500,000, and 62.3 percent earned $500,000 to $1 million.

Those earning more than this tend not to pay AMT unless they're taking advantage of legal tax efficiency measures, as they will instead be paying the higher 39.6 percent federal income tax rate.

Trump's tax returns don't make it clear how he lowered his regular income tax liability to the point that it triggered AMT, but Time Money speculates he might have been able to deduct the declining value of assets that he owns and past business losses.

What are the complaints about AMT?

There have been growing complaints in recent years that more and more middle class earners were being snared by AMT because the exemptions created to ensure the tax only impacted the rich weren't linked to inflation.

In 1970, just 19,000 people paid AMT, CNBC notes. By 2011 this had risen to more than 4 million as the thresholds barely changed while people's earnings and assets rose considerably.

Congress changed this in 2013 so it now rises every year in line with inflation.

Nonetheless, it remains unpopular with those who have to pay it, particularly those at the lower end of the earning scale.

Among its opponents are the president himself, who in a 2016 campaign pledge said he wanted to create four income tax brackets and a new tax code that would eliminate, among other things, the AMT.

Bloomberg reports House Leader Paul Ryan is also in favor of repealing the AMT.

The Atlantic reports if Trump was successful in repealing the AMT, his effective tax rate in 2005 would have been about 4 percent.

Next Up

Screen Shot 2022-05-23 at 9.58.36 PM

Eric Perkins, Miss Minnesota, Paul Fletcher create new podcast

The podcast is released Tuesdays at 8 a.m. and is available wherever you find podcasts.

Mock aircraft cabin.

MSP Airport debuts mock aircraft to help ease flying anxiety

The pre-flight experiences cover the TSA screening procedure, exploring a terminal, boarding a plane and meeting a pilot, and preparing for takeoff.

Scripps National Spelling Bee

These Minnesota kids will be competing at National Spelling Bee

The upcoming event in Maryland will be the first fully in-person Scripps National Spelling Bee since 2019.

covid, kids

New data shows how omicron has impacted kids in Minnesota

The new data shows breakthrough data during the omicron period, which began Dec. 19, 2021.

Javen Juan Moreno

Albert Lea shooting suspect arrested after 3 weeks on the run

He is accused of shooting a man in the upper thigh on May 1.

motorcycle

Motorcyclist, 59, killed after losing control on right curve

The Harley Davidson rider was thrown from his bike.

state capitol Minnesota

Minnesota's 2022 legislative session: What's happening?

A list of items agreed upon and yet to reach any bipartisan agreement in the latest legislative session.

water drain

Water main break floods 40-45 homes in St. Louis Park

The city says the rupture happened on Minnetonka Boulevard.

Eli Hart

Charges: 6-year-old Eli Hart shot up to 9 times by his mother

The 28-year-old is facing 2nd-degree murder charges.

dave lee wcco radio

Former WCCO Radio host Dave Lee moves into podcasts

His new podcast, called 'My First Concert,' launched last week.

Tow Boat

Tow boat collides with Mississippi River lock and dam in Alma, WI

The crash remains under investigation by the United States Coast Guard.

unsplash school bus

Police: Man in minivan approached kids, claimed he was former principal

Investigators say children were approached by a man in a white minivan who falsely claimed he'd been a local school principal.

Related

Key points from Trump's tax plan: What would it mean for your finances?

His plan would have major implications for families and businesses.

Study: Proposed Trump, GOP tax plan mainly benefits the 1%

The middle classes will receive a slight tax cut – and in 10 years' time might even pay more.

Who would be the winners and losers from the Senate tax bill?

The Senate passed the tax bill late Friday night.

Americans are slow to do their tax returns this year – is a new law to blame?

Around 5.5 million fewer Americans have submitted their tax returns compared to the same period last year.

How low-income home buyers in MN could be hit by one of Trump's first decisions

Low-income, first-time home buyers could have saved hundreds of dollars a year.

5 key points from President Trump's $4.1 trillion budget proposal

Trump's budget features welfare cuts, extra defense spending, and implications for student loans.

What's in the tax reform bill just passed by the House?

Also, find out how your Minnesota representative voted on it.