What You Need to Know About the AMT
The alternative minimum tax is affecting more and more people. And little is being done about it.
From Kiplinger's Personal Finance magazine, March 2007
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1. Not making millions? All the more reason to worry! The alternative minimum tax, enacted nearly 40 years ago to ensure that wealthy taxpayers pay at least some federal income tax, is working its way down the income-bracket chain. Unless Congress makes fundamental changes, by 2010 the AMT will hit half of those earning between $75,000 and $100,000, and some earning even less will also be affected. "All the growth is in the lower income classes," says Jeff Rohaly, tax-modeling director of the Tax Policy Center.
2. Alternative minimum? Think mandatory and maximum. In theory, everyone who files a return is obligated to figure out whether he or she owes the tax. You do this by calculating your taxes twice, first by using the regular tax code and then by using the AMT, which has its own set of rates and rules and allows fewer deductions. If your AMT liability exceeds your regular tax bill, you have to pay the AMT. According to the Tax Policy Center, people who pay the AMT this year will owe an average of $6,782 more.
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3. Tax cuts don't count. The tax cuts of 2001 and 2003 doubled your odds of being snared. That's because, unlike the regular tax code, the AMT has never been indexed for inflation, so more middle-class taxpayers owe the AMT each year. If the current tax cuts (which are scheduled to expire in 2010) are extended, 53 million filers -- or nearly half of all taxpayers -- will pay the AMT in 2017.
4. You'll need an accountant. The Internal Revenue Service claims that you can figure out whether you owe the AMT in "five to ten minutes" by using their new "AMT Assistant" (available online at http://apps.irs.gov/app/amt). But let's be honest -- it's a complicated, time-consuming process. And completing the AMT Form 6251 is "like doing a second return," says Mark Luscombe, principal tax analyst with CCH, a tax-information service. Perhaps that's why an estimated 75% of AMT payers hire a professional.
5. There's no escape from AMT hell. Although there are extraordinary events that could push you into the AMT, such as exercising incentive stock options or even winning a lawsuit, the two biggest triggers are paying a lot in state and local taxes and having a large family. And short of moving to a state with
no income tax (Texas, anyone?) or putting your kids up for adoption, there's nothing you can do about it. "Once you're in it one year, you're in it the next," says Tom Ochsenschlager, the American Institute of Certified Public Accountants' vice-president of taxation. "It's a tar pit."
6. And it's not going away. To shield middle-income taxpayers from the AMT, Congress has provided only Band-Aid relief over the years -- a patch here, a patch there. Why no real reform or longer-term relief? Blame it on the numbers, says Chris Edwards, tax-policy studies director at the Cato Institute. "If you extend AMT relief for one year, the five- and ten-year budget impact looks smaller than if you were to extend relief permanently." Indeed, getting rid of the AMT altogether may cost more than $1 trillion over the next decade.