The AMT: Not Just for Rich People Any More

Doug French

Members of President Bush’s advisory panel on tax reform agree that the individual Alternative Minimum Tax (AMT) should be repealed. The panel’s chairman, former senator Connie Mack of Florida, cited the AMT’s “extremely negative effect” on middle-income taxpayers as the nine-member panel reached its first conclusion.

Unfortunately, Chairman Mack was also quoted as saying, “The issue is still open as to how we’re going to pay for it”—implying once again that all of our earnings are the government’s property, and that if we are allowed to keep more of our incomes, then it is a cost to the government.

But there is no more insidious tax than the AMT, and it’s not just for rich people anymore. The idea for AMT started in 1969 when Treasury Secretary Joseph W. Barr informed Congress that 155 individual taxpayers with $200,000 ($1.2 million in today’s dollars) or more annual incomes had paid no federal income taxes in 1966. Outraged that wealthy taxpayers could escape paying taxes altogether by taking advantage of tax laws, Congress approved a minimum tax that was succeeded by the AMT. Significantly, at that time the top tax rate was 90 percent, and the tax code was loaded with tax loopholes aplenty.

“The trouble is that the AMT is deliberately not inflation adjusted,” economist Lew Rockwell explains, “and hence is imperial vis-à-vis the decline in purchasing power. The more the Fed inflates, the more people get roped into the system.” Thus, by 1999, there were one million taxpayers subject to it. This year, according to the Urban-Brookings Tax Policy Center Microsimulation Model, an estimated 3.5 million taxpayers will pay AMT, and by 2010 nearly 31 million taxpayers will be subject to AMT, including 16.8 percent of filers with incomes of $50,000 to $75,000 and 49.1 percent of filers with incomes of $75,000 to $100,000.

According to Leonard E. Burman, William G. Gale and Jeffrey Rohaly, writing in the Journal of Economic Perspectives, “By 2010, among married couples with two or more children and income between $75,000 and $100,000, 89 percent will face the AMT.”

The AMT consists of two tax brackets—26 percent for incomes below $175,000, and 28 percent for incomes above. Where it snares most people, according to the Tax Foundation, is that the AMT takes away many of the deductions and tax preferences allowed by the regular income tax, including deductions for state and local income taxes, unreimbursed business expenses, and certain medical expenses. It also taxes people exercising incentive stock options on the difference between an option’s exercise price and the stock’s value at exercise—essentially making option exercisers pre-pay taxes before profits are realized. The result is that taxpayers with many deductions, credits or incentive options most likely will be caught up in the AMT.

“The AMT primarily affects middle- to upper-middle income taxpayers,” according to the Tax Foundation. “This should not come as a surprise, since most tax preferences Congress writes into the regular income tax code are aimed at benefiting this group of taxpayers for political reasons.” Interesting, “the wealthiest taxpayers are unaffected because they already face the nation’s highest effective tax rates under the regular income tax system.”

This would be news to tax-happy liberals like writer Hugh Jackson, who wrote recently on his blog: “Full repeal seems a tad generous to the super-rich.”

The AMT is notoriously complex and forces taxpayers to figure their taxes two different ways often creating a paperwork and record-keeping nightmare that sends them to high-priced accountants to sort out the mess at great expense.

According to the National Taxpayer Advocate and the Internal Revenue Service, the AMT is one of the most difficult and complex areas of tax law. Many taxpayers will be forced to complete AMT forms but will not owe additional tax. And, as Burman, Gale and Rohaly point out; “the tax will impose greater compliance burdens on middle-class taxpayers, a group that was never the tax’s main target.” Instead of focusing on the tax shelters for the rich, the original target of AMT, an increasing share of its revenue now comes from ordinary provisions like the disallowance of personal exemptions and standard deductions.

Ironically, the tax cuts made early this decade, not only didn’t change AMT, but more than double the projected number of taxpayers who will face the AMT by 2010.

If you haven’t had to deal with AMT yet, count yourself lucky—but not for long.

Doug French is executive vice president for a Southern Nevada bank and a policy fellow of the Nevada Policy Research Institute.