AMT to Hit Record Number of Taxpayers This Year
Senior Editor, CNBC
The alternative minimum tax—better known by its dreaded acronym AMT—will trap more taxpayers in 2011 than at anytime in its 42 year history.
An estimated 4.3 million Americans are expected to pay the AMT for the past tax year, according to the Tax Policy Center.
That will be the highest number on record—up from 605,000 in 1997, 3.9 million in 2008, and 4.2 million in 2010.
The majority of those paying the tax—originally designed to target only the highest of incomes—will be making under $200,000.
"You could say the AMT is working 'too well' because more taxpayers who don't consider themselves rich now have to pay it each year," says Jerry Zimmerman, a professor of business administration and accounting at the University of Rochester.
As the AMT catches more people, the question for many is "why me?" for a tax that was supposed to target the 'one percenters.'
The AMT has widened because the tax—unlike other taxes—has never been indexed to inflation. So as incomes have gone up, many taxpayers have been pushed into ATM tax brackets that have remained the same.
The purpose for avoiding the inflation index was money, says William Gale, a senior fellow at the Brookings Institute and co-director of the Tax Policy Center.
"The government would simply get less tax revenue if the ATM was indexed," explains Gale. "Policy makers pretty much knew that from the start. It should be indexed but it's not."
Expansion also came as certain AMT deductions were eliminated and rates raised—especially in the late 1980's and early 90's—putting more people in its grasp.
A more recent spurt of growth for the AMT comes from Bush tax cuts of 2001 to 2006.
The cuts decreased many tax rates for all income brackets, including for higher end incomes—but they did not change AMT rates or exemptions. That triggered AMT eligibility for more households in middle to upper middle incomes,according to the Center on Budget and Policy Priorities.
Now, more than half of the AMT is paid by those having current annual income between $150,000 and $200,000. And a final bill for the AMT isn't cheap. On average,the AMT can cost taxpayers anywhere from $2,000 to $15,000, which is added to their regular tax fees.
"The AMT has lost its original intent," says J.R. Miller, a tax partner at the accounting firm of Frazier & Deeter. "While it still hits higher earners, it's become a surprise tax for many middle to lower middle income people."
The AMT—begun in 1970—is a separately calculated tax that eliminates certain credits and deductions and was designed to make sure people with the highest of incomes paid their fair share of taxes.
It was public outrage over a total of 155 people with incomes of more than $200,000—some $1.1 million in today's money—who weren't paying any federal income tax that got the AMT started. But four decades later, thousands of earners with incomes as low as $38,000have to calculate the AMT to see if they must pay.
What's kept the AMT from an even wider reach are the so-called 'patches.' These have been yearly moves by Congress to raise certain AMT exemption and deduction rates. The 2011 exemptions are expected to keep some 21 million people from falling into the AMT.
Because so many do pay, the AMT is front and center in the tax reform debate.
In his 2013 budget proposal, President Obama said he would replace the AMT with a simpler new tax law for the wealthy—the so called Buffett Rule—that would have people with annual incomes of more than $1 million pay at least 30 percent of their income in federal tax.
For their part, Republicans have proposed ending the AMT along with the lowering of overall tax rates,and having two tax brackets of 10 percent and 25 percent.
But the fight to change tax codes and the AMT, will likely end in the usual political squabbling, says Jerry Zimmerman.
"Both Republicans and Democrats use tax policy as a way to promote their public policy," Zimmerman goes on to say. "So when you talk about changing rates and the AMT, the question becomes 'what are we trying to do here?'" That's when it becomes difficult to get an agreement. They have different agendas."
And there's the money. Nearly $40 billion is expected from 2011 AMT revenues. Figuring out what would replace it—and where the tax burden would fall—becomes problematic.
"Getting rid of it can just means you have to find other sources of revenue," says Jim Nunns, a senior fellow at the Tax Policy Center. "Figuring out which taxpayers have to pick up the slack is another battle. Warren Buffett aside, you won't find many volunteers."
As for 2012, all taxpayers can do is wait for Congress to approve another patch. That's because the current one from the 2010 Tax Relief Actis over, leaving as many as 31.2 million taxpayers affected by the AMT this tax year and almost 55 million by 2022—if no patches are in place.
"They will likely pass one in late November after the election," says J.R. Miller. "It would be surprising if Congress didn't."
But this yearly waiting game begs the question of why lawmakers just don't pass a longer patch extension.
"It's money," says William Gale. "At this point they know they can get more revenues because of inflation and more people in the AMT with one year patches as opposed to say making a five to ten year patch at the same tax rates. It comes out with more money on a yearly basis."
As to the future for AMT taxpayers, it's a bleak one, according to Jerry Zimmerman.
"We need massive simplification of the tax system and to get rid of the AMT," Zimmerman argues. "We need to eliminate tax loopholes and and have lower rates, while making sure there's enough revenue. If you ask me if that's likely anytime soon and if the AMT be eliminated, the answer is no."