Friday, January 4, 2013


The dreaded Alternative Minimum Tax (AMT) is a strange animal.

Congress has passed a permanent AMT "patch" - indexing for inflation of the AMT exemption amounts.  While this is more better than no patch at all, the better action would be to get rid of the damned thing altogether as part of a total overhaul of the Tax Code.  But we must take what we can get. 

The dreaded AMT, which should more appropriately be called the Mandatory Maximum Tax, was originally enacted in 1969 in response to testimony by the Secretary of the Treasury that 155 individuals with Adjusted Gross Income of more than $200,000 (over $1 Million in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 idiots, rather than responding by acting logically and eliminating the loopholes in the tax code that allowed the high income individuals to avoid paying tax the fools reacted and 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.  But instead of doing away with the AMT, as should have been done, the Act revised it into a kind of “stealth tax” to deceive the American public.

We were told that TRA 86 would reduce and, to a degree simplify, taxes for all – which it did under the “regular” income tax.  But what Washington gave with one hand via the regular tax they took back from the middle and upper middle class with the other hand via the dreaded AMT.

To be sure the current AMT does not affect the truly wealthy – the so-called 1%.  As I said, it takes its toll on the middle and upper middle class, especially penalizing families in highly taxed states.  

The calculation of the dreaded AMT begins with net taxable income on the 1040, before the deduction for exemptions, and adds back what are considered to be “tax preferences”.  All taxes and all miscellaneous deductions claimed on Schedule A are among these preferences, as is interest on home equity debt not used to buy, build, or improve a personal residence.  The Standard Deduction is also a preference, and is added back in determining Alternative Minimum Taxable Income (AMTI).  A special AMT exemption, based on filing status, is allowed.  This exemption is phased out as the AMTI increases.

The dreaded AMT is a flat 26%, increasing to 28% for income, after the exemption, above $175,000 (or $87,500 for Married Filing Separately).

While qualified dividends and long-term capital gains are taxed at reduced rates, both for regular tax and the dreaded AMT, this income is included in the calculation of AMTI, and therefore can reduce the allowable AMT exemption.

Under TRA 86 the AMT exemptions were not indexed for inflation.  These amounts were slightly increased by the Omnibus Budget Reconciliation Act of 1993, but again not indexed for inflation.  They were raised for tax years 2001 through 2004 by the Economic Growth and Tax Relief Reconciliation Act of 2001.  The Jobs and Growth Tax Relief Reconciliation Act of 2003 increased the exemption amounts again for 2003 and 2004, and these amounts were extended for 2005 by the Working Families Tax Relief Act of 2004.

What has become known as the “AMT patch”, the annual indexing of the exemptions for inflation, began with 2006.  However the “patch” was not made permanent, and has had to be extended each year, one year at a time (except when it was extended for 2 years in 2010), by the idiots in Congress. 

The last “patch” expired on December 31, 2011, and was not extended for 2012.

The Senate compromise bill permanently "fixes" the AMT beginning in 2011.  A better solution would be to do away completely with the dreaded AMT as part of a substantive overhaul of the convoluted Tax Code.


No comments: