A recent leak of President Donald Trump's 2005 tax filings revealed Trump’s effective tax rate in 2005 was around 25 percent. However, without a special type of tax called the Alternative Minimum Tax (AMT), Trump’s tax rate could have been as low as 3.5 percent, even though he reported income of $150 million.
Why The Richest Pay Low Tax Rates
Most Americans know that, while income above $415,051 should be taxed at a rate of 39.6 percent, few millionaires and billionaires, including Trump, end up paying rates that high. During the 2012 campaign season, Mitt Romney reported paying only a 14 percent income tax rate despite earning an adjusted gross income of $21.7 million in 2010. Hillary Clinton supporter and billionaire Berkshire Hathaway Inc (NYSE: BRK.A) (NYSE: BRK.B) CEO Warren Buffett reported an effective tax rate of only 16 percent in 2015.
Trump, Romney, Buffett and other wealthy Americans take advantage of legal loopholes and deductions to shave their tax rates down as low as possible. The AMT was implemented back in 1969 to place a cap on the amount of loopholes the extremely wealthy can use.
The AMT is an alternative tax calculation that typically only kicks in for Americans earning more than $200,000 per year. The AMT is potentially triggered when filers claim a number of deduction types, including state and local taxes, children and other dependents. Unfortunately, money in tax shelters is not counted toward the AMT. In addition, capital gains taxes from stocks and other assets get special treatment.
As a result, 62 percent of Americans earning between $500,000 and $1 million will trigger the AMT in 2017, while only 18 percent of those earning more than $1 million will be subject to the AMT.
Trump has made tax reform a primary policy objective.
Current Tax Brackets
Here's a look the individual income tax brackets as they stand today:
And here’s what they would look like under Trump’s proposal:
However, Trump wants to do more than just change the individual income tax brackets. He also wants to eliminate the AMT completely.
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“This new tax code eliminates the marriage penalty and the alternative minimum tax while providing the lowest tax rate since before World War II,” Trump said in a 2016 campaign speech.
While a number of Americans would enjoy lower tax rates under Trump’s proposed plan, the removal of the AMT would leave a tax loophole large enough for millionaires and billionaires to drive a tank through.
So far, the stock market has cheered Trump's policies of lower taxes and less corporate regulation. The SPDR S&P 500 ETF Trust (NYSE: SPY) is up an incredible 11.0 percent since Election Day.
However, Americans paying income tax rates of 20 percent or higher are already frustrated enough seeing billionaires like Trump and Buffett paying effective income tax rates in the teens. The removal of the AMT could easily allow many of them to essentially pay no meaningful income tax at all.
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