From reformers to politicians, everybody’s talking about the alternative minimum tax, but nobody seems to be doing anything about it.
The AMT, enacted in 1969 to reduce the use by the super-rich of special deductions to avoid paying their share of income tax, has spiraled out of control. This year you have a 1 in 10 chance of getting walloped with a higher-than-expected tax bill thanks to the AMT, and by 2010 one out of every three households is expected to fall into the AMT trap.
Without sweeping reform, a married couple with two kids and an income of $75,000 to $100,000 has a 97 percent chance of paying AMT in 2010, according to the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution.
The private sector agrees.
“It is not going to get better,” said John Battaglia, a director at Deloitte & Touche’s New York office. “It is going to get worse.”
The Taxpayer Advocate’s office, an independent organization within the Internal Revenue Service, called AMT the most serious problem facing taxpayers in 2003.
“Congress must address the AMT before it bogs down tax administration and increases taxpayers’ cynicism to such a level that overall compliance declines,” wrote national Taxpayer Advocate Nina Olson in her 2003 annual report.
How did we get into this fix? Critics say it’s the confluence of tax cuts throughout the decades and the lack of adjusting AMT exemptions for inflation. That combination has created a troublesome mix as incomes creep up and AMT exemptions remain the same, making more taxpayers susceptible to AMT.
“It’s gone way beyond affecting the number of taxpayers it was intended to affect,” said Francis Romano, Taxpayer Advocate in Hartford, Conn. “First of all, many people are not aware of it, and that in and of itself is a problem. People don’t know to look for it.”
Congress has put a band-aid on the growing wound by bumping up the AMT exemption in 2003 and 2004. But those exemptions are scheduled to revert to lower levels in 2005, which traps more middle-class taxpayers.
Tax experts advise most filers to work through a 12-line questionnaire in the IRS instruction booklet to see if they are subject to AMT. If you are, you will have another 65-line form to wade through if you do a paper return. Tax software should automatically alert users to any AMT liability, but it will not explain why you will have to pay more in taxes.
Some taxpayers may be more susceptible than others. A few possible triggers:
– High state income taxes. If you live in California, Connecticut, New Jersey or New York, you have a big chance of getting caught, said John Nersesian, managing director for Nuveen Investments in Chicago. Paying lofty property taxes can also snare you.
– Heavy miscellaneous deductions. You could be setting yourself up for a higher AMT bill if you rack up a significant amount of assorted deductions. Money spent on items such as medical procedures, your job, investment advisers–typically subtracted from gross income–gets added back when figuring out AMT, and that can jack up your tax liability.
– Incentive stock options. Under the regular system, you would not pay taxes if you buy stock at the option price but then do not sell it at the market price, but under AMT rules, you pay taxes when options are exercised.
