Mar 11 2007

Many families feel 'stealth' tax sting

The Huntsville Times

By BRIAN LAWSON

AMT snares millions more each year despite patches

Despite this being the era of shrunken income taxes, the alternative minimum tax - designed in 1969 to ensure that the wealthiest Americans paid some taxes - has escaped congressional wrath and now threatens to sock millions of middle class families.

The AMT, as it is known, was set up as a deduction-unfriendly approach to guard against tax dodges by high-income earners, and essentially works as a parallel tax system.

Congress has patched the system in recent years, raising the exemption rate to shield most middle-income families, but since the tax has no adjustment for inflation and no patch yet identified for 2007, some 23 million Americans could face the tax next year, up from 4.2 million in 2006.

After people complete their regular tax returns, they are supposed to check to see if they are obligated to pay the AMT. The lack of inflation adjustment pushes more families closer to its rate, but Congress has raised the exemption level in recent years to protect many more taxpayers from owing the AMT. For the 2006 income year, the exemption set by Congress was $62,550 for joint filers, $42,500 for unmarried filers.

Like the tax itself, the reasons are complicated.

For U.S. Sen. Richard Shelby, the tax is missing its intended mark.

"This tax was created in the 1960s and was intended to ensure that a handful of extremely wealthy individuals did not escape paying federal income tax, yet last year 3.5 million people paid the AMT," said Shelby, R-Tuscaloosa. "In 10 years, that number could be as high as 50 million, unless we find a way to ensure that the wealthiest among us continue to pay their fair share of taxes without penalizing the progress being made by an increasing number of Americans.''

Who owes?

Smart Money magazine writer Bill Bischoff, in the January online edition, advised taxpayers with "gross income over $75,000 with write-offs for personal exemptions, taxes and home-equity loan interest" to see if they're liable for the tax. He also advised those who exercised incentive stock options during the year, or who own a business, rental properties, partnership interests or S corporation stock to use IRS Form 6251 to check if the tax is owed. Those with income of more than $100,000 should run the numbers, Bischoff said.

For many households earning $50,000 and up, the AMT can hit those with large families and a number of personal family exemptions, people with high medical expenses, those with stock-option exercises and residents of areas with high local and state taxes.

The AMT doesn't recognize many deductions and sets higher thresholds before allowing medical cost deductions, and it taxes stock-option exercises even before a stock sale, based on fair market value.

When comparing the standard income tax with the AMT, the higher bill is the one that is due to be paid.

The tax doesn't have many fans, but the suggestion to "just get rid of it" ignores the Washington reality that the tax provides the federal government a lot of revenue.

If the tax were eliminated along with the 2001 and 2003 tax cuts, it would mean about $800 billion less revenue over 10 years, from 2008 to 2017. If the tax cuts are made permanent, the estimated revenue loss would be $1.5 trillion over 10 years, according to the Washington-based Tax Policy Center.

Choices

U.S. Sen. Jeff Sessions said the tax needs to be addressed, but he said repealing it would reward taxpayers in states with high taxes, while taxpayers in states such as Alabama, who comprise a small percentage of current AMT filers, wouldn't see much benefit.

"We only have a limited amount of money to use in tax reductions; it shouldn't all go into this tax," said Sessions, R-Mobile.

Sessions expects Congress to approve a patch on the AMT for 2007 and likely 2008.

In an era of deficits and hard budget choices, Congress has generally been reluctant to do more than try to limit the damage to most taxpayers with the patches, said Aviva Aron-Dine, a tax policy specialist for the Center on Budget and Policy Priorities.

The problem with the current approach, she said, is that is still catches a number of higher-middle-income families in the AMT snare.

Aron-Dine said the Center on Budget is intrigued by a measure that would ensure people earning $150,000 or less would not owe the tax, rather than an outright repeal or continued patches.

Grover Norquist, president of the conservative group Americans for Tax Reform, called the AMT a "worst-case example of everything wrong with tax policy in this country," in testimony before a House Ways and Means subcommittee hearing Wednesday. Norquist called for a repeal of the tax, and short of that, lowering its current 26 and 28 percent rates.

The subcommittee on Select Revenue Measures held the first in a planned series of hearings last week on the AMT, with the stated aim of identifying its problems and hoping to identify a lasting solution.

U.S. Rep. Richard Neal, D-Mass., the subcommittee's chairman, said a bipartisan fix is needed to the bipartisan problem.

"It is a parallel and stealth tax system estimated to hit 23 million taxpayers this year, if we do not extend a $50 billion patch to the system," Neal said. "This year, a family of four earning just $66,000 could be hit by the AMT.

"By the end of the decade, virtually all families earning between $75,000 and $100,000 with two children will be paying higher taxes due to the AMT."

Neal has not yet offered his preferred plan to address the AMT.

U.S. Rep. Bud Cramer, D-Huntsville, said he is concerned about the tax burden extending to more of the middle class.

"The House leadership has promised to consider legislation this year to simplify the AMT," Cramer said. "We must ensure that these efforts are consistent with previous tax relief bills that provide a reprieve without increasing the deficit."