The AMT - what is it, and why should I care?
	An Expatriate Example
	Whose brilliant idea was this anyway?

The AMT - what is it, and why should I care?

The alternative minimum tax (AMT) is an alternative tax code that is intended to guarantee that people in the high tax brackets pay their fare share of taxes. In a nutshell the, the AMT is computed by taking (at least) 26% of the income above the AMT exemption. If the AMT exceeds the standard tax liability, then that taxpayer is liable for the difference. The computation excludes many tax benefits.

FYI: The AMT exemption for joint filers is $49,000 for tax years 2001 and 2002. It has been increased to $58,000 for joint filers for tax years 2003 and 2004.

For expatriates, the good news is that 90% of the foreign tax credit is valid against the AMT liability. So the bottom line for high income earners is to expect a 2.6% liability. This would kick in for earned income exceeding the amount of the AMT exemption. If you happen to using the foreign earned income exclusion (2555), then the AMT will kick in for income exceeding the exclusion PLUS the AMT exemption.

High-income expatriates must take the AMT into consideration. They will incur a tax liability of $260 for every $10k of earned income in excess of the AMT exemption. If the AMT exceeds the child tax credit, then the family should consider taking the foreign earned income exclusion, form 2555.

Note: For tax year 2005 and onward, the foreign tax credit on the AMT has been increased to 100% . This means that the "double taxation" has been eliminated.

An Expatriate Example

Take an expatriate example to clarify the issue. The Brady's are an American family living and working in Italy. They have five children and earned the equivalent of $80,000 in 2003. After taking the standard deduction and exemptions, they are left with a taxable income of $49,150 and a tax of $6,676. Because tax rates are higher in Italy than in the U.S.A., they are entitled to a full foreign tax credit and owe no standard tax. Now the AMT kicks in at 26% of the earnings above the exemption of $58,000, or 0.26 X ($80,000 - $58,000), or $5,720. Now they reduce the AMT by 90%, or $5148, and are left with a tax liability of $572 ($5720 - $5148). They are entitled to the child tax credit for $5,000 and are left with a net refund of $4428 ($5000 - $572). See Figure 1 below.

Figure 1 - AMT Tax Liability

The Urban Institute set out to answer this question. Here is their answer:

"The practice of requiring well-to-do Americans to pay a minimum tax was developed more than three decades ago. In January 1969, then-Treasury Secretary Joseph W. Barr informed Congress that 155 individual taxpayers with incomes exceeding $200,000 had paid no federal income tax in 1966. The news set off a political firestorm. Members of Congress were deluged with more constituent letters about the untaxed 155 in 1969 than about the Vietnam War. Later that year, Congress created a minimum tax to prevent wealthy individuals from taking undue advantage of tax laws to reduce or eliminate their federal income tax liability."

Unfortunately, what began as a policy to close loopholes for the very wealthy has evolved into an unfair burden to working families.

Read the complete article from the Urban Institute.