Skip to comments.AMT is the 'Darth Vader' of taxes
Posted on 04/17/2006 12:48:15 PM PDT by SmithL
Here's what politicians don't say when they boast about cutting income taxes: Every trim forces more Americans to pay the dreaded alternative minimum tax instead.
"It is the great American bait and switch," said Claudia Hill, owner of a Cupertino tax-preparation firm and editor in chief of the Journal of Tax Practice & Procedures. "They say, 'We're going to give you tax breaks' -- and then you find out you don't qualify."
This parallel tax system was created two generations ago to take away tax breaks from about 150 wealthy taxpayers who had piled up write-offs to erase their tax bills. Chances are, it seems irrelevant if you aren't among the 4 million taxpayers who owe it for 2005.
But give it time -- a year, to be exact. These days you don't have to be rich for the AMT to wipe out your write-offs.
Although most of them are unaware of it, 21 million Americans are on the hook to pay the AMT next tax season barring intervention from Congress. Some experts predict lawmakers will restore an expired tax provision that had slowed the AMT's spread through 2005. If they don't, however, it will unleash a fivefold increase in the number of taxpayers who will owe what one prominent U.S. senator calls the "Darth Vader of the tax code."
The AMT's dark side is that its burden increasingly will be borne by middle-class taxpayers by intensifying the "marriage penalty," biting big families harder, erasing itemized deductions and shrinking breaks related to kids.
In 2006, a family of four will step into the AMT quicksand once its adjusted gross income exceeds $67,500 -- just for claiming the standard deduction and four personal exemptions, the Congressional Budget Office says.
"What we're seeing is an explosive, grossly disproportionate impact on the middle class," said Kristofer Neslund, associate dean for Golden Gate University's School of Taxation.
That's not the way it started. The AMT was enacted in 1969 to thwart a handful of wealthy taxpayers from piling up tax breaks to avoid paying a fair share of taxes. It erases a raft of whopping write-offs in affluent places like Silicon Valley, notably deductions for mortgage interest, property taxes, state income taxes and miscellaneous itemized deductions. The AMT also targets capital gains and dividend income and paper profits on incentive stock options.
That gives the valley's affluent population reason to practice duck-and-cover drills as the AMT explodes:
The AMT will strike 35 percent of all taxpayers with $50,000 to $100,000 of adjusted gross income in 2006 -- up from 1 percent in 2005, according to the CBO. Two out of three will owe it in 2010.
The AMT will hit 81 percent of taxpayers with $100,000 to $200,000 of adjusted income in 2006, nearly five times the 17 percent share in 2005. It will net more than 95 percent in 2010.
The spark for the 2006 explosion is the expiration of a provision at the end of 2005 that slashed the deductions exempt under AMT rules. Now, married couples can exempt $45,000 in 2006 vs. $58,000 in 2005.
The long-term flaw in the AMT, however, is that it's not indexed for inflation. If it were, the exemption thresholds would be about twice as high.
Experts believe there is enough bipartisan support for Congress to pass a retroactive provision that would raise the AMT threshold for 2006. The Senate took a step in that direction Feb. 2 when it voted 66-31 to approve a $70 billion tax bill that would patch the AMT and extend rate cuts on capital gains and dividends.
So far, however, the House bill doesn't include a patch. A raft of factors are at play, including differences between the House and Senate over the timing and cost of extending tax cuts, and give-and-take between the parties over spending cuts and tax policy.
The fate of the AMT "has become wedge issue," said Clint Stretch, a director for Deloitte & Touche.
Rep. William Thomas, chairman of the House Ways and Means Committee, recently described another political factor: Prescribing another painkiller could numb the middle-class outrage that will be crucial for broader reforms.
"Might it not help the momentum on tax reform if a few more people understood the impact of the AMT?" the Bakersfield Republican asked last November.
Abolishing the AMT wouldn't be easy. Because of the AMT's explosive projected growth, repealing it would cost the government a staggering $1.2 trillion in tax revenue over the next 10 years. That's equal to about an 11 percent across-the-board increase in tax rates, the Treasury estimates.
Karen Brosi, an enrolled agent in Palo Alto, called it "political suicide" for lawmakers to repeal the AMT if it means deepening the budget deficit. "I don't care which side of the aisle you sit on, you cannot pass that legislation, because you can't pay for it."
President Bush recognized that reality when he told his tax reform panel last year that it must find a dollar of revenue for every dollar of proposed tax cuts. The panel's ideas started with slashing the deduction for mortgage interest and overhauling several popular exemptions and credits.
Outrage from homeowners and the real estate industry was swift, and the panel's recommendations were virtually dead on arrival. But tax-policy clashes on Capitol Hill and Bush's floundering approval ratings make it unlikely the AMT will be abolished any time soon.
"We are not looking at tax reform this year or probably during the Bush presidency," said Elizabeth Garrett, a USC law professor who served on the Bush panel. "Maybe they'll resurrect it in 2007, but then at that time everyone will be looking at the next presidential race."
Use the IRS, Luke. Use the IRS!
The best part - it hits blue states more than red states - wonder if democrat politicians want to grant a tax cut to their voters...
The AMT nearly got me this year, and the sole reason was that we sold a house. So they tell you the tax rate on a capital gain is 15%, but then they nail you because you didn't pay the tax that they wanted you to pay on the capital gain. WTH?
Fortunately we kept digging and found a clause that excluded our capital gain, which knocked out the AMT. I'm still peeved, though.
"The best part - it hits blue states more than red states - wonder if democrat politicians want to grant a tax cut to their voters..."
This just in, there are alot of conservative Republicans that live in "blue" states.
If this is what we get for voting in Republicans, I want no part of it. At least the Rats tell you they're going to raise taxes.
Republicans piss on your leg and tell you it's raining.
The conventional wisdom around here is, better a Republican piss on your leg than a Democrat.
Well, I don't care for any piss -- blue or red -- on my leg. But that's just me.
Republicans have had the power (more or less) to right this wrong since 1995.
Yet, here we are, 11+ years later.
"Smaller-government conservatives" my @ss.
I chuckled when I heard that my sister recently learned that her husband's income falls into this bracket. Her comment, "But, we're not RICH." She doesn't even understand what the leftist's definition of wealth is. She considers herself one of the "little people". I agree, in that she keeps her eyes closed when it comes to the world around her and just how much it costs.
Republicans will only piss on you for 30 seconds instead of 45 like the democrats will. However the republicans will demand a thank you for the 15 seconds you didn't get pissed on.
Riiiiight...like the voters are even paying attention to the 2.7 trillion already being spent this year. Democrats just don't want to repeal the AMT because it isn't hurting their blue-collar/minority base much at all, and the wealthy liberals can easily be guilted into supporting its retention in the code.
Abolish the IRS, pass the fairtax
That must have been a LOT of capital gains.
Envy is an ugly thing. It is also a destructive force in a free society. Why should I care if a few wealthy individuals manage not to pay their "fair share" (whatever that means) -- especially if forcing them to pay more means I will have to pay more too?
It erases a raft of whopping write-offs in affluent places like Silicon Valley, notably deductions for mortgage interest, property taxes, state income taxes and miscellaneous itemized deductions. The AMT also targets capital gains and dividend income and paper profits on incentive stock options.
In other words, it is a tax on success.
Senator Chuck Grassley has been the chairman of the Committee on Finance since 2003. He hasn't done crap to fix this problem, but he's had time to find $50 million of the taxpayer's money to build some stupid rainforest in his home state of Iowa.
Not to mention, this is a powerfully anti-family tax. If you want to avoid the AMT, don't get married, and don't have kids.
What is amusing is that 99% of those fussing about the Republicans will go ahead and vote Republican next election.
And the one after than and the one after that....
And the GOP knows it.
But they feel good griping about it.
NATO. No Action, Talk Only.
Yep, nasty little tax there. Our instructor showed us how a family of 8 with a certain amount of income could barely come under the AMT and not have to pay more. But simply add two more children in there and now that income is subject to additional AMT.