President Trump's tax plan calls for the repeal of a tax that once cost him $31 million

President Donald Trump has promised his tax plan will deliver the "biggest tax cut in history."

It also promises to repeal a tax that cost the president $31 million in 2005

The much-anticipated nine-page framework, released on Wednesday, includes the repeal of the so-called alternative minimum tax for individuals.

The decades-old tax, which was enacted to make sure the rich pay their fair share, "accounted for most of the $38.5 million in taxes" the president paid in 2005.

What is the alternative minimum tax?

The original purpose of the AMT was to prevent very wealthy Americans from using deductions and loopholes to skimp on their taxes.

One way to look at it is as a secondary tax code. The AMT has a set of rates and rules that are distinct from the regular tax code and apply to certain high-income earners, trusts, estates, and corporations.

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Guide to commonly-used US tax forms
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Guide to commonly-used US tax forms

The 1040 family of tax forms is for federal income tax and is absolutely essential for all.

The 1040EZ form is the simplest version and is typically filed by those who:

  • Have no dependents
  • Are younger than 65
  • Earned less than $100,000
  • Don’t plan to itemize deductions

Form 1040A is more comprehensive than 1040EZ, but simpler than the regular 1040. It's beneficial for those who earn less than $100,000 and don’t have self-employment income -- but who want to make adjustments to their taxable income, such as child tax credits or deductions for student-loan interest. Note that it doesn't allow for itemized deductions.

Form 1040 is filled out by those who make $100,000 or more, have self-employment income or plan to itemize deductions.

The W-2 is completed by employers document each employee's earnings for the calendar year. You will want to take a look at this tax form for important information you'll need to fill out your 1040, 1040A or 1040EZ. 
The 1098 form is filled out by those who:
  • paid interest on a mortgage
  • paid interest on a student loan 
  • paid college tuition
  • donated a motor vehicle to charity

The 1099 series is reports all income that isn’t salary, wages or tips, and must be reported on both the state and federal level.

1099-DIV reports dividends, distributions, capital gains and federal income tax withheld from investment accounts, including mutual fund accounts.

1099-INT trakcs interest income earned on investments.

1099-OID (Original Issue Discount) is provided if you received more than the stated redemption price on maturing bonds.

1099-MISC documents self-employment earnings, as well as miscellaneous income such as royalties, commissions or rents. It covers all non-employee income that is not derived from investments.

If you receive a refund that you're unable to pay in full, you can request a monthly installment plan using Form 9465.
Don't forget to notify the IRS if you move! Use Form 8822 to change your address with the Internal Revenue Service. Otherwise, notices, refunds paid with a paper check and other correspondence relating to your personal, gift and estate taxes will be sent to your former address.
Anyone who has been employed by a company has completed a Form W-9. The W-9 is used by employers for payroll purposes -- and the information on the W-9 is used to prepare employee paychecks during the year and W-2 forms at the end of the year. 
The W-4 is an IRS form completed for employers know how much money to withhold from your paycheck for federal taxes. Accurately completing your W-4 can both ensure you don't have a big balance due at tax time and also prevent you from overpaying your taxes.
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So when corporations or individuals fall under the auspices of the AMT, their tax bills are figured out differently than those of ordinary taxpayers. Trump's repeal appears to only apply to individuals, according to the framework. 

"Basically, it's the difference between your regular tax bill, figured using ordinary income tax rates, and your AMT bill, figured by filling out more IRS paperwork," Bankrate's Kay Bell said. "When there's a difference, you must pay that amount, the AMT, in addition to your regular tax."

The point of the AMT is to make sure wealthy Americans who earn above a certain amount pay a flat minimum tax rate — hence the name — even if they could get away with paying zero or very little taxes in the regular system. But many opponents of the tax say it targets people in the upper-middle class, not the uber-rich.

Here's the history

The AMT originated in the late 1960s. The Department of the Treasury said that about 150 people legally paid zero federal income tax in 1966 by claiming deductions "and not including certain kinds of income." Naturally, taxpayers of modest means were ticked off.

According to Forbes, Congress received more complaints about those "tax-dodgers" than it did about the Vietnam War. So it responded by enacting the minimum tax, the AMT's predecessor, in 1969.

The current version of the AMT was implemented in 1982. Since then, it has received several touch-ups.

Today, however, the AMT, doesn't strictly apply to superrich Americans, as it was originally intended. Since the AMT wasn't indexed for inflation until 2013, the number of people who fall under the AMT umbrella has increased significantly since the 1970s and includes "30 percent of households with cash income between $200,000 and $500,000," according to figures from the Urban-Brookings Tax Policy Center cited by Bloomberg. In total, it applied to 3% of all taxpayers in 2005, according to data from the IRS.

Why some people think it's a good idea to repeal or replace it

Most critics of the AMT oppose the tax because it doesn't target the people and organizations it was originally aimed at.

"It was originally targeted at the super-wealthy when it came out, but the super-wealthy in most cases don't pay it," Scott Aber, a certified public accountant, told CNBC in December.

Daniel Shaviro is a professor at the New York University School of Law, and he knows a thing or two about the AMT — he played a role in changing the tax in the 1980s.

He told Business Insider that the law in its current form "doesn't address [today's] tax-avoidance methods."

"It does not address sophisticated modern tax-avoidance techniques, such as Larry Ellison, who is worth $50 billion, getting a $1 salary and borrowing against the value of his appreciated stock, or companies such as Apple directing their global profits to tax-haven subsidiaries," Shaviro added.

According to Trump's tax framework, two nonpartisan committees have called for the repeal of the tax. 

"The nonpartisan Joint Committee on Taxation (JCT) and the Internal Revenue Service (IRS) Taxpayer Advocate have both recommended repealing the AMT because it no longer serves its intended purpose and creates significant complexity," the framework said. 

Still, a repeal of the tax could cost the federal government $412.8 billion, according to the Tax Policy Center.

The president has said he would make up for that cost by reducing the number of deductions in the tax code.

NOW WATCH: Traders are gearing up for Trump's tax cut plan

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