Thursday, March 10, 2005

AMT Woes: The Monster is Growing

The Alternative Minimum Tax (AMT) has received much attention in recent years, as it has grown from a program targeting the “rich” whom Congress thought weren’t paying enough taxes to a growing labyrinth for “middle class” taxpayers to navigate. The AMT is an alternative income tax system that starts with taxable income computed under the regular tax system, and then makes certain adjustments to expand the tax base. Rates of 26 percent ($175,000 or less) or 28 percent (over $175,000) are then applied to determine the alternative minimum tax. Taxpayers pay the higher of the two, thus ensuring that benefits from lower tax rates and various deductions and credits are reduced or eliminated.

An exemption amount is available, but it is set at only $58,000 for a married couple – so this can start to bite people who are not rich by any stretch of the imagination. Particularly hard hit by this tax are those perennial tax scoffs with lots of children, high medical expenses, and high state taxes. (I am, of course, being facetious here.) Employees who have to bear some of their own business expenses (such as commissioned salespeople, or faculty who visit at another school for a term) are also potential targets. Prior to a legislative fix in late 2004, litigants also faced high AMT burdens as a result of winning taxable awards, as their attorney’s fees and costs were not deductible for AMT purposes. Sometimes, this lead to tax liabilities that exceeded the amount that the plaintiff earned. (For more on this, see my article, Taxing Plaintiffs: A Look at Tax Accounting for Attorney’s Fees and Litigation Costs, 107 Dickinson Law Review 405 (2003)).

A Treasury “fact sheet” issued earlier this month indicates that 3.8 million taxpayers will be affected in 2005, and this bill balloon to 20.5 million in 2006. Looking further out to the future, the numbers become staggeringly large. The revenue cost of repeal is also growing, making it a difficult political feat to repeal the AMT. In 2006, the Treasury estimates $33.9 Billion from AMT, growing to $210 Billion in 2014.

Bills to repeal AMT have been introduced, including one yesterday by representatives McCrery (R. La.) and English (R Pa.) This will be an important issue to address as part of any fundamental tax reform that may be on the agenda.

Edward A. Morse
Professor of Law
Creighton University School of Law

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