Which of the following statements regarding taxes is correct?

Which of the following statements regarding taxes is correct?

• A. Everyone pays the same amount of taxes regardless of income
• B. All tax deductions apply equally to everyone
• C. Individuals must calculate taxes both ways under the Alternative Minimum Tax
• D. Taxes are static and do not change year to year

Answer: (C)

The statement about individuals needing to calculate taxes both ways under the Alternative Minimum Tax (AMT) is correct because the AMT is a parallel tax calculation that ensures individuals who benefit from certain exclusions, deductions, or credits still pay a minimum amount of tax. Taxpayers must compute their regular tax liability based on the standard structure of the tax code and then calculate their AMT liability, which disallows some deductions and credits. If the AMT liability is higher than the regular tax, the taxpayer must pay the AMT amount. This dual calculation is a key feature of the AMT system, designed to prevent high-income earners from completely avoiding taxation through various tax benefits. In contrast, the other statements are inaccurate because they oversimplify tax principles. The idea that everyone pays the same amount of taxes disregards progressive tax rates; tax deductions vary in applicability depending on individual circumstances, and tax laws are subject to change and can vary annually.

The statement about individuals needing to calculate taxes both ways under the Alternative Minimum Tax (AMT) is correct because the AMT is a parallel tax calculation that ensures individuals who benefit from certain exclusions, deductions, or credits still pay a minimum amount of tax.

Taxpayers must compute their regular tax liability based on the standard structure of the tax code and then calculate their AMT liability, which disallows some deductions and credits. If the AMT liability is higher than the regular tax, the taxpayer must pay the AMT amount. This dual calculation is a key feature of the AMT system, designed to prevent high-income earners from completely avoiding taxation through various tax benefits.

In contrast, the other statements are inaccurate because they oversimplify tax principles. The idea that everyone pays the same amount of taxes disregards progressive tax rates; tax deductions vary in applicability depending on individual circumstances, and tax laws are subject to change and can vary annually.