Tax trap

March 05, 2004

JUST WHEN many Americans are expecting a few extra bucks from the Bush administration's tax cuts, more and more taxpayers - including more and more middle-income earners - are in danger of falling into a costly and complex trap: the alternative minimum tax.

Not heard of it? You will. The AMT has to be among the very worst Internal Revenue Service concoctions ever authorized by Congress. It cries out for a permanent fix.

The AMT hasn't accomplished its original intent: making sure all high-income earners pay at least some taxes. At the same time, it's increasingly raising taxes for those making as little as $75,000 a year. And just what no one needs: It adds an entirely new layer of tax calculations - a bedeviling 65-line form - to an already insane tax system.

The history of the AMT goes back to 1969, when Congress - reacting to news that 155 taxpayers made more than $200,000 in 1967 but paid zero taxes - enacted a 10 percent tax on deductions over $30,000. Over the years, that essentially evolved into the AMT. These days, a tiny fraction of the rich still legally avoid paying any taxes but 2.6 million taxpayers will be caught by the AMT on their 2003 taxes - rising by 2010 to 33 million filers, or a third of all taxpayers, if nothing is done.

This shadow tax system works like this: You jump through all the hoops of figuring out your taxes the standard way. Then you figure the AMT by adding back to your income many of your deductions, doing far too many calculations, and then applying a tax rate of at least 26 percent to the result. If your AMT liability is more than your standard tax, guess which one you pay?

It's an often regressive tax system in which being married, having children, living in a high-tax state, incurring a lot of medical expenses and even having the wrong kinds of tax-free bonds - among many disallowed deductions - can raise your taxes. Worse, it hasn't been indexed for inflation, so the Urban-Brookings Tax Policy Center estimates that by 2010, more than 90 percent of those making more than $100,000 a year and more than 70 percent of those earning from $75,000 to $100,000 will be hit by the AMT.

The Bush administration is trying to extend a partial AMT repair into 2005 - to limit its impact to 4 million filers next year, not 13 million. But the administration hasn't sought a permanent fix. That seems odd until you consider that it might cost an estimated $500 billion to $1 trillion, providing another good reason for rejecting the president's highest priority: making permanent his even more costly tax cuts that largely benefit the well-off.

Let's see if we've got this straight then. Congress sets out to make the rich pay their fair share, but that morphs into a system also forcing many middle-income earners to pay thousands of dollars each in added taxes. Then the president won't permanently fix that problem because it would make it harder for him to ensure dramatically lower taxes for the well-off. And you thought the plain old 1040 made no sense?

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