There is a lot of talk about repealing the Alternative Minimum Tax (AMT) and how the AMT is unfair because it increases taxes on hardworking Americans. However, there is a general misunderstanding on exactly what the AMT is, so much that the GOP plan would simultaneously repeal the AMT while making it a permanent fixture of the tax code. Confused? No problem, let me explain exactly how the proposed tax plans make the AMT permanent.

What is the AMT?

The Alternative Minimum Tax, or more commonly referred to as the AMT, is a tax code that stands apart from the regular tax code. The name may sound deceiving because the AMT is by no means a way to ‘minimize’ your tax – if anything it’s quite the opposite.

The AMT is essentially the bouncer of the tax code – it gives taxpayers an extra pat-down before letting them into the club. The original purpose of the AMT was to ensure that higher income taxpayers didn’t take advantage of certain deductions so much that it significantly reduced their tax bill.

In layman’s terms – higher income taxpayers will compute their tax using both AMT rules as well as regular tax rules, and then pay the higher of the two. Sounds ridiculous, right?

But over the years the AMT has been slowly creeping down the income tax brackets and impacting more and more taxpayers. What was intended to only impact top earners now impacts over 5 million taxpayers.

How is AMT Computed?

Calculating tax under AMT rules is complicated, so I’ll break it down into simple terms:

1. There are no standard deductions or personal exemptions under the AMT rules. Instead there are large exemptions for married couples, single filers, head of households and married filing separate ($54,300, $84,500, $54,300, $42,250 respectively).
2. These exemptions phase out over certain dollar thresholds so that taxpayers will lose $.25 in exemptions for every dollar their income exceeds the phaseout ($120,700, $160,900, $120,700, $80,450).
3. Not allowed to deduct 2% miscellaneous itemized deductions (tax prep fees, unreimbursed job expenses, union dues, etc.).
4. No deduction for state and local income taxes.
5. Medical deductions are deductible but only to the extent they exceed 10% of AGI (for regular tax, those who are 65 years of age or over may deduct medical expenses exceeding 7.5% of AGI).
6. Mortgage interest can be restricted in certain circumstances (primarily through the use of a home equity loan).
7.  The top tax rate under the AMT is 28%.

What is the Proposed Legislation?

Now let’s take a look at the proposed legislation and see if we can notice any similarities:

1. No more personal exemptions, but there is a doubled standard deduction.
2. The standard deduction phases out for high income earners making over $1 million.
3. Elimination of the 2% miscellaneous itemized deduction.
4. Elimination of the state and local income tax deduction.
5. Elimination of the medical expense deduction (House Bill).
6. Mortgage interest capped at $500,000 in principal (House Bill…Senate version would keep the mortgage interest deduction intact but eliminate the property tax deduction)
7. Top rate is 39.6% in the House version and 38.5% in the Senate version (Could be as high as 43.4% factoring in the net investment tax).

Notice Anything Similar?

If you noticed a pattern between the AMT and the proposed tax legislation, then you’re not alone. What the proposed legislation does is repeal the normal tax and make permanent the AMT (not the other way around).

What’s worse is that the current AMT has a top rate of 28% while the new proposed rate of 39.6% is significantly higher. Taxpayers in high tax states like New York, New Jersey and California would alleviate some of this bite with the state and local tax deduction, the mortgage interest deduction, and the property tax deduction – but the proposed legislation limits those deductions or eliminates them altogether.

The trade-off used to be:

1. Lose some of your deductions while paying a lower top rate, or
2. Pay a higher rate but keep all of your deductions.

Thus, it seems like the new tax regime would eliminate almost all the deductions while imposing a stiffer higher rate.