Middle-class taxpayers caught in tax trap
All set to
enjoy your cut of the latest tax breaks?
Don't spend it too fast. If your taxable income and
deductions meet certain criteria, you may lose that tax break and likely pay even
more, thanks to a little known but increasingly worrisome "stealth tax"
called the individual alternative minimum tax, or AMT.
name suggests, the AMT is a separate, but parallel, tax system that operates alongside
the one we're used to wrestling with. The AMT imposes a flat tax of 26 percent
to 28 percent. That doesn't sound so bad when you consider that the regular tax
system has two higher rates, 33 percent and 35 percent.
notoriously complex AMT, however, was designed to make sure that the wealthy paid
their fair share of taxes. To that end, it has different definitions of income
and allows fewer deductions. When all the calculations are complete, it produces
a higher tax bill than does the regular tax system -- and the affected taxpayer
must pay the larger amount.
And it's no longer just the affluent
who are paying AMT. A growing number of not-so-wealthy taxpayers are discovering
that they, too, are hit with this higher tax.
So what can you
do to beat this extra tax burden? Unfortunately, not much. Because of its peculiarities,
this parallel tax defies most traditional tax planning.
best hope now for taxpayers is to convince lawmakers that changes need to be made
to the AMT. Politicians normally might be receptive to the argument that the AMT
burden is now falling on people for whom it was not meant. But the plea for AMT
relief is complicated by the fact that regular tax-rate cuts have made the federal
treasury more dependent on the alternative tax revenue.
the tax debate continues, and to keep you from being blindsided by the tax, here's
a look at the AMT's history and how you could fall into its clutches.
Congress created the alternative tax in 1969 in the wake
of testimony by Treasury Secretary Joseph Barr that 155 high-income households
had paid zero tax in 1966.
Unfortunately, the lawmakers failed
to index the AMT for inflation. As a result, the tax patch originally designed
to target wealthy tax dodgers now is increasingly hitting unwitting middle-income
households. If you have a large family, incentive stock options or live in states
such as New York or California where state taxes are high, you may well be blindsided
"A few years ago, we started seeing people with
very large families getting hit with this tax. That was kind of the canary in
the coal mine," says Beth Kern, associate professor of accounting at Indiana
"Now it's to the point that if you have four
kids, it will eventually come to your door. When you look at the actual numbers
and estimates that are coming out, it's phenomenal what is going to happen in
the next couple years. It's on the way."
Got your attention? Now get ready for the scary figures.
Gale, deputy director and senior fellow of economic studies at the nonpartisan
Tax Policy Center, says that under current law, AMT coverage will skyrocket.
In 1999, a million filers faced the AMT. By 2010, the tax will hit 33 million
taxpayers, about one-third of all returns. The U.S. Treasury Department released
figures on April 2 that project more than 46 million filers will pay AMT in 2014.