Something Wicked This Way Comes — A Democrat Congress Tryin’ To Fix The Alternative Minimum Tax

Posted By: 'Okie' | 10:42 am — 6/10/2007 | 2 Comments See comments below:

Ooh Boy! Our esteemed elected representatives on Capital Hill are taking it upon themselves to “fix” the Alternative Minimum Tax (AMT). Not that this turkey of a tax doesn’t need fixin’, ’cause it sure ‘nough does — it’s just that those tax-&-spenders across the isle will never get this one right. Of course, after they get through with it and the public gets the bitter taste of their first tax bill afterwards, the approval rating of Congress will be of Ehud Olmert proportions.

First, a bit of historical perspective. Way back in 1969 the Congress tried to do something to right a perceived wrong that was inherent with the tax code of the day. Evidently, 155 of the wealthiest U.S. households were being targeted by this new type of tax, an Alternative Minimum Tax (AMT), ’cause through a combination of tax shelters, deductions and dodges, these 155 households were paying ZERO, or close to that, in income taxes on income equivalent to $1.2 million in 2007 dollars. Not really fair to the average Joe Blow — pretty sweet for those 155 ultra high-rolling Gottrocks. What Congress screwed up though was in not indexing the AMT for inflation, but as long as it only affected a few hundred tax returns, and then over the next few years only a couple thousand, and then — a few tens of thousand — you didn’t hear much complaining, unless you were one of the privileged few or somethin’.

Then a funny thing happened — the inflation of the ’70s and then the stagflation late in that decade and the early ’80s, and suddenly a lot more taxpayers were being told by their accountants that they had to pay for two tax return preparations — the regular one and one that would calculate if they were gonna owe under the AMT — and a lot more did just that . . . OWE! So the question begged is, why hasn’t Congress addressed this decades-old problem? Why have they let a program designed to affect less than 200 households potentially affect 20% of all taxpayers by the year 2010? As ol’ Bubba would have said, “it’s the revenue, stupid.”

What Congress wasn’t telling us was that there was so much income being brought into the system by the AMT that it was going to be extremely problematic to do away with it. When the Bush tax cuts were implemented, the AMT was a way to silently offset the revenue-depleting effects of those tax cuts, keeping mucho tax dollars continuing to flow into the IRS coffers. Bet that makes you feel all warm and cuddly for your fearless Congressmen/women. Makes one want to give ol’ Nancy P. a big hug right? Or maybe, just give all of them a good hard shaking back to some taxpayer-oriented reality.

The AMT was legislated in 1969 and implemented in 1970 with the intent to prevent the wealthiest of Americans from using tax shelters and masses of deductions to literally pay NO income taxes. But, as Wikipedia shows, today’s AMT “[a]ffected taxpayers are those who have what are known as “tax preference items”. These include long-term capital gains, accelerated depreciation, certain medical expenses, percentage depletion, certain tax-exempt income, certain credits, personal exemptions, and the standard deduction.” That’s a pretty big net which results in an enormous catch of revenue for the Feds.

If you’ve never been hit with the AMT, you probably don’t know what all the fuss is all about. If you have, you’ll never forget it, and unless your income drops, it’ll be your little April 15th buddy for life. The reason I’m so familiar with this tax is that my wife is a tax accountant, has her own agency and many clients in the biz, so she works very hard to keep these folks from getting hit with the AMT, but there’s only so much that you can do. From Wikipedia again:

The AMT was introduced by the Tax Reform Act of 1969, and became operative in 1970. It was intended to target 155 high-income households that had been eligible for so many tax benefits that they owed little or no income tax under the tax code of the time.

In recent years, the AMT has been under increased attention. Because the AMT is not indexed to inflation and recent tax cuts, an increasing number of middle-income taxpayers have been finding themselves subject to this tax.

In 2006, the IRS’s National Taxpayer Advocate’s report highlighted the AMT as the single most serious problem with the tax code. The advocate noted that the AMT punishes taxpayers for having children or living in a high-tax state, and that the complexity of the AMT leads most taxpayers who owe AMT not realizing it until preparing their returns or being notified by the IRS.

A 2004 Congressional Budget Office Brief stated:

Over the coming decade, a growing number of taxpayers will become liable for the AMT. In 2010, if nothing is changed, one in five taxpayers will have AMT liability and nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax. Rather than affecting only high-income taxpayers who would otherwise pay no tax, the AMT has extended its reach to many upper-middle-income households.

So, it would seem like Congressional action to fix this mess would be most appreciated. Well, maybe if the leadership had an “R” next to it. House Democrats are thinking about this:

House Democrats looking to spare millions of middle-class families from the expensive bite of the alternative minimum tax are considering adding a surcharge of 4 percent or more to the tax bills of the nation’s wealthiest households.

Under one version of the proposal, about 1 million families would be hit with a 4.3 percent surtax on income over $500,000, which would raise enough money to permit Congress to abolish the alternative minimum tax for millions of households earning less than $250,000 a year, according to Democratic aides and others familiar with the plan.

Rep. Richard E. Neal (D-Mass.), chairman of the House subcommittee with primary responsibility for the AMT, said that option would also lower AMT bills for families making $250,000 to $500,000. And it would pay for reductions under the regular income tax for married couples, children and the working poor.

All told, the proposal would lower taxes for as many as 90 million households, and Neal said it has broad support among House leaders and Democrats on the tax-writing House Ways and Means Committee. “Everybody’s on board,” he said.

Neal has yet to release details of the plan, however, and others inside and outside the committee say major pieces of it are still in flux. Some Democrats say Neal’s plan stretches the definition of the middle class too far, providing AMT relief to too many wealthy households. They argue that the cutoff for families to be spared from the AMT should be lower, at $200,000, $150,000 or even $75,000.

Democrats never like it when folks make money, unless they can take a big chunk of it from them and spend it themselves. Lest you think that you’ll be safe if you’re making under 75-100 grand a year, consider this:

Because the AMT was not indexed for inflation, its reach has expanded annually, delivering a significant tax increase this spring to an estimated 4 million households. The AMT would have spread even more rapidly after President Bush’s tax cuts reduced taxpayers’ normal bills, but Congress enacted yearly “patches” to restrain its growth. The most recent patch expired in December, and unless Congress acts, the tax is projected to strike more than 23 million households next spring, many of them earning as little as $50,000 a year.

The Democrats can either go along with another patch to keep the ATM from hitting that 23 million households, or next spring’s tax season is gonna start a riot. Better bend over, grab your ankles and get ready for it! The Tax Foundation isn’t impressed with the way this Congress is headed and writes in May of this year:

Congress has recognized that it simply will not repeal tax preferences that benefit politically powerful groups no matter how unjustified those tax breaks are in principle. In fact, it regularly enacts new tax breaks in the regular income tax and expands old ones, so the AMT backstop is the way Congress has settled on to limit their impact on the treasury.
{…}
The key to fixing the AMT lies in the regular tax code. By curtailing the myriad exclusions, deductions, exemptions, and credits in the code we could expand the tax base. This would allow us to raise the same revenue with lower tax rates, reduce the number of filers affected by the AMT, improve the overall quality of the tax system, boost the nation’s economic well-being, and improve tax equity.

The most often quoted number that I can find on the cost of repeal of the AMT is from the Left-leaning Center on Budget and Policy Priorities which stated in Feb. 07, “[T]he cost of AMT repeal would equal more than $1.5 trillion over the next ten years[.]” The Tax Policy Center has its own proposal to do away with the AMT, a tax surcharge of 4% on singles earning over $100,000 and couples over $200,000. The Left sees the elimination of this tax as a threat, pure and simple. The Right just wants a more transparent, simpler tax code with lower taxes overall, for all — a flat tax, or consumption tax, or a national sales tax instead of progressive income taxes. But seeing what was accomplished with eight years of GOP control of Congress lets me safely say that these reforms —

Ain’t. Ever. Gonna. Happen!

The best that we can hope for is more “tax reform” to go with all the previous “tax reform”? Gee, that’s reassuring! Now that we have a Democrat-controlled Congress that is on record that the Bush tax cuts will expire in 2010 without renewal, and now that these same legislators are just itchin’ to massage the AMT to raise rates, and most likely lower the application threshold before they’re through, let’s all channel our inner Harry Bellefonte and sing a little song.

Pay Oh! Oh paaaaaaaaaay oh,
AMT comin’ to take our dough.

Two hundred, seventy five, fifty thousand!

AMT comin’ to take our dough.

No more deductions for our housin’!
AMT comin’ to take our dough.

Pay, pay pay pay, pay pay pay, pay pay paaaaaaay oh,
AMT comin’ to take all our dough.

That’s one boat ride I’d like to skip! 😉

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This entry was posted on Sunday, June 10th, 2007 at 10:42 am and is filed under Tax! TAx! TAX!. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.  |  Print This Post Print This Post  |  Email This Post Email This Post

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