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."
That is using static projection. Taking away greater and greater portions of peoples' incomes must not be understood as depressing economic activity and reducing taxable incomes which is the real world effect. That $1.2 tril as a net increase will never be realized by the government because the increasing tax burden will foreclose on a lot of new capital formation that would produce a lot of new taxable income. That is elementary economic sense and is thus not useful to government people who are more interested in the control that higher tax gives them than in the actual revenues realized.
I agree. And now it's biting us in the butt. But nobody cared before because "the rich are finally getting theirs'."
Paid it this year.
Really pissed me off.
I don't think it's wise for anyone to hold their breath about tax reform. Sure, we get the same lip service each year from March until May. Once tax season is over and the next news cycle begins, our Congressmen breathe their bi-partisan sigh of relief and say "We snowed 'em again for another year!"
ping
I made slightly more this year than last, but less than some prior years.
But we have a newborn, born in 2005, which should have reduced my taxes.
The AMT cost me about $680.
Sorry to burst your bubble, but I am single, no kids and still got hit with AMT this year. To the tune of 16,000 extra. What a killer. And I don't consider myself rich either.
I am inclined to agree with you, but I have several reservations about some of the consumption tax proposals:
First, the level of federal spending is much too high, regardless of how the taxes are collected.
Second, I would consider a national consumption tax only if all forms of the income tax were killed and buried forever. This would undoubtedly require a constitutional amendment. If this is not done, we could end up with both kinds of taxes.
Third, sale taxes are considered "regressive," which have led some to propose some kind of rebate to make the taxes more "progressive." This would create another messy bureaucracy, and would tempt politicians to tinker further with the tax code.
If the 3rd party platforms weren't so idiotic, then maybe they'd get some support.
Also, if they'd bother to recruit in other than presidential election years.
I've decided they're in it only for the federal matching funds.
And whats the alternative for voting Republican????
By not voting Republican we would have J F'in Kerry right now.
Or we would have had Al Bore.
Look what happened the last time people either stayed home or voted non republican.
8 years of The Perjuror, The Rapist, The Traitor, whatever you want to call him.
8 years of the most destructive times in this countries history. All because people decided to act like children, and throw a hissy fit, instead of acting like grown ups and voting for what was best for this country.
It was a nice chunk of change. Fortunately we sold it right at the end of the fifteen-year military exclusion. Whew!
The income tax would have to be terminated, perhaps a constitutional amendment would do the trick, unless it was repealed as in the past.
Yep, instead of having the lesser of two evils, we are stuck with the evil of two lessers. And yes, I will have to hold my nose and vote GOP, but it still stinks.
Gee, the Republicans control both Houses of Congress and the White House. And the reason they haven't gotten rid of the AMT in the last five years is...(crickets chirping)...
"What is amusing is that 99% of those fussing about the Republicans will go ahead and vote Republican next election. "
I won't and I dont give a damn. I live in Chris Shays district. I wont vote for his opponent, but I will vote for Lieberman in the Senate. I hope the Dems take the Senate and we have gridlock. Hopefully Republicans keep the House.
Governs least, governs best. I am tired of this *HIT!
Excellent question. The AMT should go the way of the dodo bird, along with the death tax. Permanently.
Insanity is doing the same thing over and over while expecting diferent results.
Y'all are proving my point.
More a case of the only choices being the bad choice, and the even worse choice. The GOP is the bad choice.
Wake me up when there is a legitimate third party. In the mean time, I'm playing the hand I've been dealt.
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