More U.S. taxpayers facing AMT nightmare
In 1970, the federal government created a complex, separate set of federal income-tax calculations designed to thwart a few hundred Americans who were using multiple tax write-offs to avoid paying income taxes.
The Alternative Minimum Tax ensured the wealthiest Americans paid at least some federal taxes. It created a completely different set of rules for figuring tax liability. Personal exemptions, deductions such as state and local taxes or second-mortgage interest, and certain tax credits available under the conventional federal tax formula are not available in the AMT formula.
Initially, the AMT ensured a few hundred well-off Americans did not live tax-free.
But next year, as many as 17 million Americans face the possibility of paying sharply higher federal taxes on 2006 income. Unfortunately, most of them won't know if they are subject to the additional taxes until they file their returns in 2007.
The problem is that tax-law writers have never indexed the AMT for inflation the way they do the main tax system. Thus its reach has grown to include about 10 percent of tax returns showing incomes of $75,000 or less, according to the Internal Revenue Service. That number is projected to increase to 20 percent by 2010. More than half the families and individuals making between $200,000 and $500,000 are now taxed under AMT rules.
By 2013, according to one scenario, the AMT will be collecting more tax revenue than the regular tax system.
Congress has the ability to fix the so-called "surprise tax," but has little incentive. In the past it has adopted temporary "patches" to adjust the AMT's reach. But Congress has so far failed to do so for 2006.
For one thing, the AMT provides additional revenue for federal coffers. Congressmen are always reluctant to reduce revenue. They see the AMT as their own personal ATM, supplying the much-needed fix to support their spending habits.
But perhaps more important is that many lawmakers see the AMT as a negotiating tool to achieve other goals. GOP leaders in the House, for example, omitted a proposed AMT fix from their prime tax-cut measure this year in favor of a provision extending lower rates on capital gains and dividends.
As more middle-income taxpayers find themselves subject to the "surprise tax," more will express outrage at their unexpected, virtually unpredictable additional tax liability.
The government should retarget the AMT to the way it was originally intended.