AMT May Be Pariah But It Is Profitable
If you believe what you hear in Washington, it’s only a matter of time before Congress approves a 2010 patch for the Alternative Minimum Tax, sparing some 23 million new taxpayers from owing an additional $3,000 to $5,000 come April 15.
Both Democratic and Republican leaders on Capitol Hill have vowed in recent weeks to enact legislation that will temporarily increase the exemption amount for current-year taxpayers.
But the spotlight being aimed at the controversial and complex AMT is also adding fuel to the fire for opponents of the parallel tax system, who are renewing their fight for its repeal.
“The right thing to do is to eliminate the AMT,” says Daniel Pilla, a tax litigation consultant and author of 11 tax-related books including “The IRS Problem Solver.” “The AMT is an admission that the tax system is unsound to begin with. If it weren’t, we wouldn’t need the AMT.”
Pres. Obama’s bipartisan Deficit Commission also recommended in late November that the AMT be abolished.
The AMT is a parallel tax system that was created in 1969 to ensure the wealthiest Americans paid at least a minimum tax each year.
In effect, it sets a floor on tax liability and eliminates many deductions and credits, such as the child and dependent care credit and deductions for taxes paid to state and local governments.
Anyone whose income falls above the AMT threshold must calculate both their regular tax and the AMT and pay the higher amount.
Because the AMT was never indexed for inflation, however, Congress is forced to “patch” the exemption level each year so it does not ensnare more modestly paid taxpayers.
The latest patch, which expired Dec. 31, 2009, raised the income threshold to $46,700 for single filers, and $70,950 for joint filers, but it reverted back in 2010 to $33,750 for single filers and $45,000 for joint filers.
“My assumption is that Congress will go ahead and certainly patch it for 2010 at some point before April 15,” says Joseph Rosenberg, research assistant for The Urban Institute-Brookings Institution Tax Policy Center.
But that’s just a temporary fix.
Nina Olson, the National Taxpayer Advocate, and head of the Office of the Taxpayer Advocate, a government office dedicated to helping taxpayers resolve problems with the Internal Revenue Service, has advocated for the AMT’s abolition for nearly a decade, noting that while short-term relief from the AMT (in the form of annual Congressional patches) is better than no relief at all, “it is still not a desirable long-term solution.”
"The absence of a permanent rule makes it more difficult for taxpayers to estimate their tax liabilities for the year and to save and pay estimated tax accordingly,” Olson writes in her most recent legislative recommendations.
At the same time, she adds, the uncertainty surrounding if and when Congress will approve another patch increases the risk that taxpayers will be subject to penalties for failure to pay sufficient estimated tax, thereby “causing taxpayer frustration and loss of confidence in the fairness of the tax system.”
And, she maintains, it imposes significant burdens on the IRS as the tax administrator, as in 2008 when the late enactment of an AMT patch delayed the start of the filing season for 13.5 million taxpayers and forced the IRS to postpone other priority work.
Considering the case for its repeal, then, why not eliminate the AMT?
The answer, as is often the case, is money.
According to the IRS, the AMT generated some $22 billion in 2008, the most recent year for which data are available. And the government's tax coffers right now need all the help they can get.
“The fact of the matter is they won’t give up the money,” says Pilla.
Olson agrees, noting the “government has become dependent” on the tax dollars brought in by the AMT.
“The obvious challenge in repealing the AMT (or even permanently indexing the AMT exemption amounts) is that the AMT’s increasing revenue stream has been built into revenue estimates, so if the AMT is repealed, either Congress will have to raise tax receipts in other ways or budget deficits will balloon,” she writes.
"Tax reform is really what the tax system needs and what the Obama Deficit Commission has proposed,” says Mark Robyn, staff economist for the Tax Foundation. “I think if you were going to see it [the AMT] repealed, it would have to be in the context of broader tax reform, basically scrapping the internal revenue code or at least the personal income tax portion of it and starting from scratch."