The first rule of AMT Club is you don't talk about AMT club.
The Alternative Minimum Tax
First passed as the part of the Tax Reform Act of 1969 the AMT was intended to go after 155 millionaires that had paid no Federal Income Tax based on their use of exemptions and deductions. Good idea, probably. Constitutional, passing laws targeting individuals or classes of individuals? (I'm not smart enough to answer that one) But, what we do know is that the AMT has now become the most insidious tax attack on the middle class ever and it's only getting worse with each passing year.
And Congress, for the most part, doesn't want to talk about it. Why? How about it is a source of revenue that's consistently below the radar and generates easy money...lots of money and its easy to take if you don't care where it comes from or pretend that you don't.
You support the middle class? You believe in tax equity based on ability to pay? You believe in tax the rich? You believe our representatives have our best interests and fairness first and foremost?
Let's explore a little further below the squiqqle.
First, full disclosure: My wife and I have been married for 31 years, have a house, 2 cars, 2 sons put through college (one graduated 2 years ago, one in his senior year - have a lot of debt to do that), we have both worked at decent jobs (though I am now 1 month from being a 99r), I think we are middle class. The AMT first bit us in 1999 and has got us every year since - even when I'm unemployed!
How we got here.
Back in 1969 as part of the TRA "Congress created an add-on tax on high-income households, equal to 10% of the sum of tax preferences in excess of $30,000 plus the taxpayer’s regular tax liability."
More from Wikipedia (http://en.wikipedia.org/...)
The AMT has undergone several changes since 1969. The most significant of those, according to the Joint Committee on Taxation, occurred under the Reagan era Tax Equity and Fiscal Responsibility Act of 1982. The law changed the AMT from an add-on tax to its current form: a parallel tax system. The current structure of the AMT reflects changes that were made by the 1982 law. Congress made other notable, but less significant, changes to the law in 1978, 1982, 1986, 1990, and 1993.
However both participation and revenues from the AMT temporarily plummeted after the 1986 changes. Further significant changes occurred as a result of the Omnibus Budget Reconciliation Acts of 1990 and 1993, which raised the AMT rate to 24%, and to 26%/28% respectively, from the prior level of 21%. Now, some taxpayers who do not have very high incomes or participate in numerous special tax benefits and/or activities will pay the AMT.
For years, Congress has passed one-year patches aimed at minimizing the impact of the tax. For the 2007 tax year, a patch was passed on 12/20/2007, but only after the IRS had already designed its forms for 2007. The IRS had to reprogram its forms to accommodate the law change.
While the AMT is not automatically indexed for inflation, the exemption has been increased by Congress several times. In addition, the rate was increased for individuals effective 1991 and 1993, and the tax was limited for capital gains and qualifying dividends in 2003.
What are the thresholds? Good question.
For Married filing jointly the AMT kicks in at $72,450 adjusted gross income in terms of loosing deductibility of exemptions and deductions. By the time (if your lucky) you hit $150,000 your deductions and exemptions go to zero.
What are some of these evil deductions and exemptions?
Miscellaneous itemized deductions are not allowed. These include all items subject to the 2% "floor", such as employee business expenses, tax preparation fees, etc.
The home mortgage interest deduction is limited to interest on purchase money mortgages for a first and second residence.
Medical expenses may be deducted only if they exceed 10% of Adjusted Gross Income, as compared to 7.5% for regular tax.
Inclusion of the bargain element of an Incentive Stock Option when exercised, regardless of whether the stock can immediately be sold.
But wait, it can't happen to me
Although the AMT was originally enacted to target 155 high-income households, it now affects millions of middle-income families each year. The number of households that pay the tax has increased significantly in the last decade: In 1997, for example, 605,000 taxpayers paid the AMT; by 2008, the number of affected taxpayers jumped to 3.9 million, or about 4% of individual taxpayers. A total of 27% of households that paid the AMT in 2008 had adjusted gross income of $200,000 or less.
The primary reason for AMT growth is the fact that the AMT exemption, unlike regular income tax items, is not indexed to inflation. This means that income thresholds do not keep pace with the cost of living. As a result, the tax affects an increasing number of households each year, as workers’ incomes adjust to inflation and surpass AMT eligibility levels. While not indexed for inflation, Congress has often passed short term increases in exemption amounts. The Tax Policy Center (a research group) estimated that if the AMT had been indexed to inflation in 1985, and if the Bush tax cuts had not gone into effect, only 300,000 taxpayers—instead of their projected 27 million—would be subject to the tax in 2010. President Barack Obama included indexing the AMT to inflation in his FY2011 budget proposal, which did not pass. AMT raised $26 Billion of $1,031 Billion total individual income tax in 2008.
Another important reason for the recent expansion of the AMT is the effect of the 2001–2006 Bush tax cuts. The tax cuts decreased marginal tax rates for all income tax brackets without making corresponding changes to AMT rates. The lower tax liabilities triggered AMT eligibility for many households, eliminating the incentive effect of the tax cuts and subjecting more households to the tax. Economists often refer to this as the “take-back effect” of the Bush tax cuts.
As the AMT has expanded, the inequalities created by the structure of the tax have become more apparent. Taxpayers are not allowed to deduct state and local taxes in calculating their AMT liability; as a result, taxpayers who live in states with high income tax rates are up to 7 times more likely to pay the AMT than those who live in states with lower income tax taxes. Similarly, taxpayers are not allowed to deduct personal exemptions in calculating their AMT liability; as a result, taxpayers with large families—and specifically families with 3 or more children—are more likely to pay the AMT than smaller families.
So what's my point?
First, the AMT has to be eliminated. Second, the Bush f'ng tax cuts need to eliminated.
Third, Congress needs to talk about AMT Club as part of any substantive discussion of tax fairness and fiscal responsibility.
Oh, I'm not done. I do want to further explore in detail in a follow on post those congress people and senators that over the decades have tried to address/redress/supported this abominable tax.
Thanks for your time. Call your congress critter....