Millions of middle-income Americans are about to be hit by the alternative minimum tax (AMT), enacted nearly 30 years ago to ensure the nation’s wealthiest citizens pay income taxes.
Congress failed to act on the AMT in 2005, leaving more than 15 million Americans to feel its bite this year. That’s four times the 3.8 million affected in 2005. The Internal Revenue Service estimates more than 30 million taxpayers will be hit by the tax by 2010 if nothing is done to change it.
“The Alternative Minimum Tax represents the single biggest threat to the wallets of tens of millions of middle-class taxpayers in 2006, yet Congress could not even agree to extend temporary safeguards from this stealth tax for another year,” said Pete Sepp, vice president of communications for the National Taxpayers Union.
“What were lawmakers thinking?” Sepp asked. “Some senators and representatives may believe that they can make everything right by simply retroactively renewing 2005 AMT exemption levels at some point in 2006, but taxpayers deserved the peace of mind–and money–of AMT protection before it ran out.”
The AMT wipes out personal and dependent tax exemptions, state and local tax exemptions, home equity loan interest deductions, some medical and dental deductions, and other common deductions.
Enacted to Catch 155 People
A form of AMT was enacted in 1969 because 155 persons with incomes higher than $200,000 were able to use exemptions and deductions to avoid paying income taxes. Nine years later, a handful of high-income households were still avoiding income taxes, and in 1978 the current AMT was enacted. Ironically, some wealthy citizens still manage to avoid paying income taxes.
The AMT is not indexed for inflation, and therefore more people become subject to the tax each year.
The AMT essentially requires people to figure their taxes two ways, first with eligible deductions and exemptions and second with most of the deductions and exemptions gone. Taxpayers must pay whichever tax bill would be higher. Many taxpayers who use tax software programs do not know they are paying a higher, AMT bill, because most packages automatically calculate the appropriate tax.
The House and Senate both passed legislation that would have extended AMT breaks that were in effect in 2004 and 2005, but they failed to agree on a final bill, and the AMT breaks expired.
The AMT tax rate is 26 percent on the first $175,000 for couples, and 28 percent on anything over that.
By 2010, 94 percent of households with two or more children and incomes between $75,000 and $100,000 will be subject to the AMT, according to Leonard Burman, co-director of the Urban-Brookings Tax Policy Center. Burman served as U.S. Treasury deputy assistant secretary during the Clinton administration and tried then to reform the AMT.
Burman said those most likely to be subject to the tax have lots of deductions or live in high-tax states.
Steve Stanek ([email protected]) is managing editor of Budget & Tax News.
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