Millions More May Pay AMT for 2006

The Alternative Minimum Tax, designed to ensure that millionaires didn’t escape paying taxes through clever use of loopholes, is hitting an increasing number of middle class taxpayers:

The alternative minimum tax is becoming even stickier — and could entangle even more taxpayers next year. Congress is expected to recess for the holidays without an agreement on how to limit the effect of the AMT for 2006. While the AMT is expected to affect about 4 million taxpayers for 2005, that number will swell to about 21.6 million for 2006 unless Congress acts to lessen the impact. Congress has said it will do so next year, making it retroactive to Jan. 1, but it’s still unclear exactly how that will play out, since other initiatives, like extending cuts on capital gains and dividends, loom in the background.

“Congress can address that dilemma, or growing probability of AMT exposure, by passing legislation that retroactively reduces that bite, and it would probably be as simple as maintaining or increasing the exemption amount,” says John Nersesian, wealth-management strategist at Nuveen Investments. “The exemption is used to ensure that moderate-income taxpayers do not fall victim to the tax.”

In the current tax year, married couples filing jointly with income above $58,000 may be subject to AMT, though that figure, or exemption, is dropping to $45,000 next year unless new legislation is passed. The exemption is phased out for those with higher incomes, or $150,000 for married couples filing jointly.

The AMT was never intended for the masses: It’s a parallel tax system that was installed in the late 1960s to ensure the wealthiest Americans were paying their fair share of taxes by reducing the amount of deductions they can take. However, it was never indexed for inflation and has increasingly trapped more middle-class taxpayers. Indeed, both proposals to revamp the tax code announced last month by the Federal Tax Reform advisery panel recommended eliminating the AMT.

To determine AMT tax liability, two calculations are necessary: one under the traditional tax system and another under the AMT system, where various deductions — such as state and local income taxes, property taxes, miscellaneous deductions and personal exemptions and others — are added back. You must pay the greater of the two.

Though the AMT rate is either 26 percent or 28 percent — a lower rate than the highest marginal tax bracket of 35 percent — it’s applied to a wider base of income, making that tax bill more costly. Also, unlike the traditional tax code, the AMT isn’t a progressive tax, but rather a flat tax.

The whole notion is quite bizarre. The tax code is set up with deductions and exemptions to both incentivize certain behaviors and to account for the fact that not all “income” is really that. A person makes investments, charitable contributions, and other financial decision based on the rules of the game. To have the rules effectively changed on them after the fact is outrageous.

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. The Lone Elm says:

    Alternative Minimum Tax Squeeze

    James Joyner on Outside the Beltway brings our attention to the ever wider reach of the Alternative Minimum Tax (AMT). As this tax snares more and more middle-class taxpayers, it will be interesting to see how Congress responds. See the

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  3. legion says:

    What’s outrageous is that the existence of the AMT at all is a tacit admission that the catalogue of tax deductions and tax rules is so complex it can’t really function on its own (at least to bring in a useful revenue stream to fund the gov’t). But rather than eliminate some deductions, or make the tax code more sensible, we added yet another rule, which is now biting us on our collective asses.

    At least, that’s my understanding of the AMT (IANA economist). I’ve been hearing for a few years now how the AMT, while well-intentioned, is becoming the Next Great Evil, and needs to be repealed, or at least fixed. I’ve never heard anyone actually publically defend it. So why hasn’t it actually _been_ fixed? I’m honestly curious here – it’s seems like a political no-brainer…

  4. James Joyner says:

    legion: Probably for the same reason that the disabled veterans/retiree offset hasn’t been fixed: Money. The “stealth tax” that the AMT brings in a lot of dough for the treasury every year. To repeal it requires making hard choices, which congressmen are loathe to do.

  5. legion says:

    James-
    That’s always been my suspicion… If the AMT is biting more middle-income folks, then almost by definition, fixing it means taking a bigger bite out of the higher-wage people just to maintain the same level of gov’t income.

  6. Jonk says:

    James, don’t even get me started on that disabled/retiree offset…*smoulders*

  7. bryan says:

    In the current tax year, married couples filing jointly with income above $58,000 may be subject to AMT, though that figure, or exemption, is dropping to $45,000 next year unless new legislation is passed. The exemption is phased out for those with higher incomes, or $150,000 for married couples filing jointly.

    That’s going to hit a pretty wide swath of America right there. If a married couple makes $29,000 each – not a very high figure – they are going to fall into AMT hell.

    I can’t wait to see what Turbo Tax does with this.

  8. Boyd says:

    I’m not sure where they get that $58,000 figure. I’ve made considerably more than that and never had to pay AMT. Yes, I have to calculate it, but I’ve never had to pay it.

    While it may be that if a married couple makes less than $58,000, there’s no possibility of having to pay under the AMT scheme, I think it much more likely that most folks would have to make a lot more than that before they have to actually use the AMT calculation as the final firgure.