The U.S. tax code treats different types of income in different ways. Some types of income are taxed at ordinary income rates, while others are taxed at lower rates or are even exempt from taxation.
Wages are taxed at ordinary income rates. This means that the tax rate on wages depends on the taxpayer’s income bracket. For example, in 2023, the top marginal tax rate on ordinary income is 37%.
Capital gains are taxed at lower rates than ordinary income. The tax rate on capital gains depends on the length of time the taxpayer held the asset before selling it. Short-term capital gains (assets held for one year or less) are taxed at the taxpayer’s ordinary income rate. Long-term capital gains (assets held for more than one year) are taxed at a lower rate, which is currently 15% for most taxpayers.
Dividends are taxed at ordinary income rates for most taxpayers. However, there is a qualified dividend deduction, which allows taxpayers to deduct a portion of their qualified dividend income from their taxable income. The qualified dividend deduction rate is currently 20% for most taxpayers.
Other types of income, such as interest income, rental income, and business income, are also taxed differently under the U.S. tax code.
What is the Alternative Minimum Tax (AMT)?
The Alternative Minimum Tax (AMT) is a separate tax system that was created to ensure that high-income taxpayers pay at least a minimum amount of tax. The AMT system has its own set of exclusions, deductions, and tax rates.
How does the AMT affect high-income individuals and businesses?
The AMT can affect high-income individuals and businesses in a number of ways. For example, the AMT can disallow certain deductions that are allowed under the regular tax system. This can increase the taxpayer’s AMT liability. Additionally, the AMT has a lower exemption amount than the regular tax system. This means that taxpayers are more likely to be subject to the AMT.
Here is an example of how the AMT can affect a high-income individual:
A single taxpayer has a taxable income of $200,000 under the regular tax system. The taxpayer also has a number of deductions, such as state and local taxes and charitable contributions. These deductions reduce the taxpayer’s taxable income to $150,000.
Under the regular tax system, the taxpayer would owe $33,000 in taxes. However, the taxpayer is also subject to the AMT. Under the AMT system, the taxpayer is not allowed to deduct state and local taxes or charitable contributions. This increases the taxpayer’s AMT taxable income to $200,000.
Under the AMT system, the taxpayer would owe $42,000 in taxes. Therefore, the taxpayer is subject to the AMT and must pay $42,000 in taxes, even though the taxpayer would only owe $33,000 in taxes under the regular tax system.
The AMT can be complex and can have a significant impact on high-income individuals and businesses. It is important to consult with a tax professional to determine if you are subject to the AMT and to understand how it may impact you.
