Update by S.Newton & Chat-GPT

The Alternative Minimum Tax (AMT) ensures that individuals, particularly high-income earners, pay a minimum amount of tax despite utilizing various tax deductions, credits, and exemptions. It is calculated separately from regular tax rules to ensure that those benefiting from substantial tax preferences still contribute a fair share.

As part of the 2023 Federal Budget and implemented through Bill C-47, effective January 1, 2024, the AMT has undergone significant reforms aimed at targeting high-income earners who utilize extensive tax preferences. The key updates include:

Increased AMT Exemption Threshold:

• • The AMT exemption threshold has been raised from $40,000 to $173,000. This substantial increase is intended to further shield low- and middle-income earners from the AMT, while narrowing the focus to higher-income individuals who may employ a greater range of tax preferences.

Higher AMT Rate:

• • The AMT rate has been increased from 15% to 20.5%. By raising the rate to 20.5%, the government is aiming to reduce the disparity in effective tax rates between high-income individuals and others, ensuring that those with higher earnings contribute a more proportional share.

Limitations on Tax Preferences:

• • The limits on tax preferences primarily target high-value deductions, such as the capital gains exemption and preferential treatment of dividends, which have been extensively used by high-income earners to significantly reduce their taxable income.

How the AMT works:

Under the AMT system, you must calculate your tax liability using both the regular tax rules and the AMT calculation. If the AMT is higher, you are required to pay that amount. However, if the AMT exceeds your regular tax for the year, you may be eligible to carry forward the excess as a credit to reduce taxes in future years when your regular tax exceeds the AMT. For example, if your regular tax calculation results in $100,000 but your AMT calculation results in $120,000, you must pay the $120,000. The difference of $20,000 could then be carried forward to reduce future tax liabilities when your regular tax exceeds the AMT.

These changes to the AMT system reflect the government’s commitment to increasing fairness in the tax system, ensuring that high-income individuals contribute proportionally despite their ability to reduce taxes through extensive use of deductions and credits.

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(Author: Sharon Basi)

September 2024