The tax, which should more appropriately be called the Mandatory Maximum Tax, was originally enacted in 1969 in response to testimony by the Secretary of the Treasury that 155 individuals with Adjusted Gross Income of more than $200,000 (over $1 Million in today’s dollars) paid “0” tax on their 1967 tax returns. Congress received more letters that year on the Secretary’s testimony than they did on the Vietnam War! Of course, Congress being Congress, rather than acting logically and eliminating the loopholes in the tax code that allowed the high income individuals to avoid paying tax they created a complicated alternative tax system.
The passive activity and other rules included in the Tax Reform Act of 1986 effectively closed many of the loopholes used by the wealthy to avoid taxes that had led to the creation of the dreaded AMT. Unfortunately the Act did not do away with the AMT.
A favorite instructor for the National Society of Tax Professionals, who has gone on to his final audit, used to tell the tale of one of his older clients. One tax season, after signing his finished returns, the gentleman told the instructor, “Dennis, I will continue to come to you to have my taxes prepared each year because you always make sure I pay the ‘minimum tax’. I like that! My old preparer never did that for me. In fact, one year he actually had me pay the ‘maximum tax’!”
Like many taxpayers today, Dennis’ client was confused about the concept of the “minimum tax”. The AMT is a separate tax system which does not allow you to deduct personal exemptions, the standard deduction, state and local income, sales, real estate and personal property taxes, or “miscellaneous” items such as employee business expenses, investment expenses and tax preparation costs. In addition, certain “tax preference items” must be added back to income in calculating the tax. The net Alternative Minimum Taxable Income, after deducting an exemption amount based on filing status and level of income, is taxed at a flat rate of either 26% or 28%.
While, like the “regular” tax, capital gains and qualified dividends are taxed separately at either 5% or 15% under AMT, such income is included in Alternative Minimum Taxable Income, and can reduce or wipe out the exemption amount. Excessive capital gains and qualified dividends can trigger the AMT.
A study by the Tax Foundation indicates that if nothing is done soon more taxpayers will be subject to the Alternative Minimum Tax than the “regular” tax. As I have stated in earlier postings, during my first 25 years as a tax preparer I only encountered the AMT in 2 cases, an outside salesmen with excessive employee business expenses and a dual-income family with large capital gains. During the past 10 tax seasons I have had more and more clients fall victim to AMT. I now check at least half of my long-forms to see if the tax will apply.
The problem was highlighted when it was reported that IRS National Taxpayer Advocate Nina Olsen, who has been calling for repeal of the AMT for years, herself fell victim to the tax. The AMT was never intended to snare civil servants!
While I cannot think of a single Congressman who has said the AMT is a good thing, nothing significant has been done because repealing it would “cost too much”. Any money generated by the dreaded Alternative Minimum Tax is “found money” – money that Congress never intended to be collected – and should not be counted on! If the regular tax alone does not raise enough revenue then the regular tax should be fixed.
The Bush tax-cuts have made more and more lower-income Americans “non-taxpayers”. Here’s an idea for a true “minimum tax” – every taxpayer with positive gross income above the appropriate filing threshold should pay a minimum federal tax of $100.00!
Incoming House Ways and Means Chairman Charles Rangel of New York has stated that his priority is to provide middle-class taxpayers with relief from the dreaded Alternative Minimum Tax. As I said in my December 30th posting let’s hope that he, and other politicians calling for repeal or reform of the tax, are sincere about taking action. The AMT must be destroyed!