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Wednesday, January 27, 2010

AMT Must Go

This month the Congressional Budget Office (CBO) released a report on the individual alternative minimum tax (AMT). The report points out how the number of individuals subject to AMT will increase dramatically in 2010 unless another "patch" is passed to increase the 1986-level exemption amounts and other adjustments.

Per the report: "Taxpayers with AGI between $200,000 and $500,000 will continue to be hit the hardest by the AMT. More than 77 percent of those taxpayers had AMT liability in 2009, and that share will grow to 98 percent in 2010. Those affected can expect to pay an additional $10,700 in tax, on average."

In his blog, CBO Director Elmendorf notes: "About 4.5 million taxpayers were affected by the AMT in 2009. That number has been kept relatively small by annual modifications to the AMT rules, but the most recent modifications expired at the end of calendar year 2009. Consequently, about 27 million taxpayers—one out of every six taxpayers—will be affected by the AMT in 2010, paying on average an additional $3,900 in tax. Nearly every married taxpayer with income between $100,000 and $500,000 will owe some alternative tax."

Clearly the individual AMT is out of control. When the AMT was broadened by the Tax Reform Act of 1986, it was not done so to reach the middle class. But the failure to adjust the exemption amounts and rate brackets for inflation have caused the AMT to just become a penalty. Also, the addition of more favorable tax deductions and credits for individuals means the AMT is more likely to kick in.

I've written about the need to repeal this tax before. I'm not the only one that has called for its repeal. The Joint Committee on Taxation, the AICPA and ABA have done the same. There should be only one minimum tax - the one we currently call the regular tax. If Congress believes that deductions and credits are allowing people to pay less than the minimum, then be more transparent about it all and just reduce or eliminate some of these numerous tax breaks that also are a source of complexity in the law.

Here is my op ed from 2007 where I call it a disgrace and point out the policy reasons why it should be repealed - Simplicity and transparency versus the dread AMT, Silicon Valley/San Jose Business Journal. The repeal will be scored as a revenue loser which is unfortunate because it would be counting dollars that never were expected back in 1986. Given the purpose of the AMT to cut back on the aggregate effect of preferential deductions and credits, Congress should cut back directly on some of these items AND stop adding new ones without getting rid of old ones!

What do you think?

1 comment:

Anonymous said...

Dear Professor -- Thanks for writing your blog entry on the AMT...this is indeed the most insidious and unfair tax out there...looks like my wife and I will be paying about $12K in AMT this year...we are California residents and upper middle class, but certainly by no means rich. Out AGI went down by $13K from 2008 to 2009, yet we are paying $2K more in AMT this year than last...when oh when is Congress ever going to reform this ridiculous "shadow tax"?