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Taking a Bigger Bite

Falling Into Alternative Minimum Trouble

By Jonathan Weisman
Washington Post Staff Writer
Sunday, March 7, 2004; Page F09

As a reporter, I had covered every jot and tittle of last year's $350 billion tax cut, so it was with some relish that my wife loaded up our tax software last month to learn just how generous President Bush would be to us with our tax rebate.

Then came our answer: What George W. Bush had bequeathed, the alternative minimum tax had rescinded, to the tune of $2,143. The parallel income tax system, enacted more than 30 years ago to ensure the rich paid their fair share, had bitten us hard.

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We are not alone in our frustration, especially in the Washington region, where the AMT will loom far larger this year than in lower-tax, lower-cost areas of the country. The Vietnam War was still boiling when an outraged Congress learned that 155 taxpayers with taxable incomes over $200,000 had paid no federal income tax in 1966. That led to the first "add-on" tax, a concept that would morph into the AMT.

Outraged lawmakers back then probably did not have in mind a reporter and his editor wife, but outrage leads to haste. When the AMT and its precursors were enacted, Congress neglected to allow its thresholds to rise with inflation, the way ordinary tax brackets do. So as incomes and costs of living rose, more and more taxpayers were ensnared.

An estimated 2.5 million households will be socked this spring by the AMT, up 400,000 from tax year 2002. That figure will rise quickly unless Congress acts, to 3.2 million in 2004, 12.1 million in 2005 and 14.9 million in 2006, according to the Internal Revenue Service's Taxpayer Advocate.

By 2008, it would cost the Treasury considerably less to repeal the ordinary income tax system than the alternative minimum tax, according to the Tax Policy Center, jointly run by the Brookings Institution and Urban Institute.

By 2010, the AMT will hit about 30 million taxpayers, most with incomes under $100,000. At that point, the AMT will be the de facto tax system for any household with income between $100,000 and $500,000, the taxpayer advocate said. At decade's end, 97 percent of married taxpayers with two or more children and income of $75,000 to $100,000 will be affected by the AMT.

Much of this exponential rise is, ironically, due to the president's tax cut. As effective ordinary tax rates fall with the tax cuts, more taxpayers will dip below the AMT's 26 percent and 28 percent tax rates. That will ensure that tens of millions of households will not see the full fruit of Congress's largess.

"The bad news before was that you had to pay higher regular taxes, so when they lowered regular taxes, you thought that was good," said Chris Sintetos, an accountant at Argy, Wiltse & Robinson in Tysons Corner. "But when the taxes came down, they dropped us below the AMT threshold."

"A lot of people are giving away what they thought they were getting," he added, "as much as 35 percent" of their tax cut.

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