America Runs on AMT

By Albert B. Crenshaw
Sunday, May 29, 2005

Did you pay it last month? I mean the alternative minimum tax.

If you did, or if you, your accountant or your computer had to work out an entire parallel tax return to figure out that you didn't have to, welcome to the middle or upper-middle class.

The AMT, as it is widely known, was created to catch up with the clever rich. Now, though, it has little impact on those folks and instead is whacking millions of fairly ordinary Americans. In fact, according to the Treasury Department, next year a typical family with two children will have to pay the AMT if its income exceeds $67,890. And by 2015, as many as 50 million taxpayers will have to pay it.

The AMT has, however, been very, very good to the Treasury. It is pulling in $18 billion in tax revenue this year, and by 2015 the AMT could be pouring $210 billion annually into the government's coffers. Washington insiders for some time now have been laughing that it would be cheaper for the government to repeal the regular income tax and keep the AMT.

This may be funny, but it's not a joke. The crossover point, when the AMT begins to produce more revenue than the regular tax, is now projected to be 2013.

The AMT is sort of a flat tax, though because of various phaseouts and other twists, it's less flat than it looks.

In broad terms, you figure it by taking your regular taxes, throwing out a bunch of deductions allowed on your regular return -- including personal exemptions and state and local taxes -- applying a very large standard deduction, and then figuring your tax at a rate of 26 or 28 percent. If that calculation produces a higher tax amount owed than was shown on your regular return, you pay the AMT.

The AMT has been around since the late 1960s, when it was discovered that -- gasp -- 155 Americans with incomes over $200,000 legally paid no income tax in 1966. They accomplished this by making extensive use of deductions and other breaks built into the law. So, rather than dealing with the breaks, Congress enacted the AMT.

It has been known for a decade or so that the AMT, which was not adjusted for inflation over the years, was creeping up on middle-income taxpayers. At the same time, because their regular tax rates are higher than the AMT's maximum 28 percent, many of the truly wealthy aren't hit by the AMT at all.

Nina Olson, the IRS National Taxpayer Advocate, says if there were one single change she could make in the tax laws, it would be to eliminate the AMT.

So why has nothing been done about it?

Last week a group of senators, led by Finance Committee Chairman Charles E. Grassley (R-Iowa) and senior Democrat Max Baucus (Mont.), introduced a bill to repeal the AMT.

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