The Alternative Minimum Tax: Your Guide To Proposed Amendments

What Is The Alternative Minimum Tax?

The Alternative Minimum Tax, or AMT, has been in existence for forty years, and has traditionally impacted only the wealthiest U.S. citizens. Traditionally, the AMT has kept those in the highest income tiers from sheltering too much of their income from taxation. Unfortunately, times have changed, and the laws governing the AMA law haven’t. This means that more people will soon be facing a much higher tax bill than the one that they are accustomed to under regular federal income tax laws. How many more people? It is estimated that approximately 23 million upper and middle income tax payers this year, and approximately 30 million by 2010, being subjected to the AMT, unless reforms are adopted soon. The AMT poses a current threat to so many people for a few reasons: The tax cuts of 2001 and 2003, including lower income tax rates, marriage penalty relief and expanded credits, reduce one’s tax liability under the regular code, but no such changes were made to the AMT, so there’s a greater chance your liability under the AMT will be higher. If it is, then you must pay the additional amount owed or take the lesser refund.

The amount of income taxpayers may exempt from consideration under AMT has not kept pace with inflation - even though the average paycheck has. The AMT disallows many tax breaks that the middle class enjoys under the regular code, such as personal exemptions for dependent children, property taxes, and state and local income taxes.

The Alternative Minimum Tax will undoubtedly be a much debated topic on the Senate floor this summer, and the following are a list of proposed amendments that may soon be discussed by United States lawmakers.

Increasing of The Rate Of Capital Gains: Capital gains are currently taxed at the same rate under the AMT as they are under the regular tax code. It has been suggested that the raising of the AMT capital gains rate as high as 28% may be a viable amendment to current AMT tax laws, but this suggestion is not likely to be implemented, since it would result in the dissolution of the capital gains tax cuts for the same top tier income bracket that have been in effect since 2001. However, only time will tell.

Addition of A Surtax: This amendment was recently proposed by the Tax Policy Center and would result in an effective repeal of the AMT. In order to pay for it, top tier income filers would be required to pay a 4 percent surtax on any adjusted gross income above $100,000 or 200,000 for joint filers. In other words, a married couple with an adjusted gross income, or AGI of $250,000 would be required to pay an additional $2,000. However, this is still less than they pay under the current law.

Repealing of State and Local Tax Deduction: This repeal, proposed by House Ways and Means Chairman Charles Rangel, could potentially make up for the full revenue loss of a simultaneous AMT repeal, and also allow for a 2 percent reduction of income tax rates, depending on the expiration rate of the President’s tax cuts. Many tax experts, however, that this amendment would result in an unfair bias against those who already reside in higher tax states. According to the Tax Foundation, this deduction would subject middle and upper middle income families in high tax states to the AMT, because the amended AMT would disallow the deduction, and therefore make it more likely that a family’s tax liability under AMT would be higher than it would be under regular tax code.

Increasing AMT Rates: Democratic tax writers in the House purportedly agreed recently on a proposal to exempt tax payers from having to pay AMT if their incomes are below $250,000, while increasing the AMT liability of those earning more than $500,000 and reducing the AMT liability of those with incomes in between. According to Tax Policy Center, excluding joint filers with income under $250,000 might mean a tax cut for approximately 66 percent of tax payers in the top 10 percent of income distribution. If this amendment is implemented, however, it may result in an average tax increase of almost 8 percent for the top 1% of tax payers.

Alternative Proposals: With the AMT quickly becoming a hot button issue, many lawmakers are availing themselves of the opportunity to submit their own AMT amendment proposals. Among these is one from Rep. Richard E Neal, which, according to some tax analysts, if adopted would do the following:

• Exempt taxpayers from having to pay AMT if their incomes are below $250,000.
• Increase the AMT liability of those earning more than $500,000.
• Lower the AMT liability of those earning between $250,000 and $500,000.
• Provide tax cuts targeting lower-income taxpayers not subject to AMT. Those cuts might include an expansion of the child tax credit.

Regardless of which reforms (if any) are adopted before the next tax deadline rolls around, you owe it to yourself to consult both your tax advisor (CPA, EA, Certified Planner) and your personal financial planner to find out exactly how the AMT impacts your financial situation.