| Middle-class
taxpayers caught in tax trap | | |
| This would make the AMT almost
as common as the mortgage interest deduction is today. The AMT will be the de
facto tax system for households with income between $100,000 and $500,000, 93
percent of which will face the tax.
The Tax Policy Center's findings also show that the
2001 tax cut has increased the number of people subject to AMT. If the AMT had
been indexed when the regular income tax was, and had the 2001 tax cut not been
enacted, only about 300,000 households would face the AMT in 2010. Among
those hardest hit by the AMT are married couples and parents. Couples will be
more than 20 times as likely as singles to face the AMT in 2010. Because the AMT
prohibits deductions for dependents, 85 percent of married couples with two or
more children will face the AMT. About 6 million taxpayers will face the AMT in
2010 simply because they have children. Why
don't federal lawmakers repeal the AMT? The short answer is money. In
comparing the AMT and regular tax rates, the Treasury found that if recent tax
cuts are extended rather let expire as originally planned, the AMT will increase
the amount of tax individuals pay in 2005 by $28 billion, rising to $177 billion
in 2014. If the AMT system is unchanged, the Treasury predicts that in just a
few years it will be more cost-effective to repeal the regular tax system and
leave the AMT in place; the U.S. coffers would get more money that way. That's
right. Left unchecked, this little-known flat tax soon could be driving the country's
revenue train.
Falling into AMT land
This year, you could fall into ATM land
if your taxable income, combined with certain adjustments and tax
preferences, exceeds the following limits in 2006:
- $62,550 and you are married filing a joint return, or
- $42,500 and you are filing as single or head of household.
- $31,275 and you are a married taxpayer filing a separate return.
AMT disallows
all standard and many itemized deductions, taxable state and local tax refunds
and intangible drilling costs. It also taxes employee incentive stock options
when exercised; the regular tax system only taxes when you sell the stock. In
AMT land, you'll take a 26-percent tax hit on your first $175,000 gross income,
and pay 28 percent above that. Most taxpayers who fall into
AMT land do so because they have a large number of personal deductions for children
or dependent parents, live in a high-tax state, or wind up with more taxable income
than expected at year's end, either because of a year-end bonus, capital gains,
severance package, or because they exercised incentive stock options. Tax
lawyer Robert Sommers
has seen the devastating effect that the AMT has had on Silicon Valley taxpayers
with incentive stock options. That's because the AMT taxes you when you exercise
your stock option, not when you sell the stock. Here's an example:
You have the option to purchase company stock at $1 a share. If, at the time you
exercise it, the share price is at $101; that is not a taxable event under the
regular tax laws. But under the AMT, the spread -- the difference between the
fair market price and what you paid for the stock -- is considered a tax preference,
and thus taxed, let's say at 28 percent, or $28 per share. Now let's say the company
stock plummets (think dot-com bust). Your stock drops to $5 a share. The AMT still
taxes you at the spread level, $28 per share, more than five times the value of
your stock. | 
