Why the Alternative Minimum Tax should be changed by Congress

Wednesday, January 19th, 2011 By

middle class amt

Taxpayers may want to avoid getting a cup of joe from this establishment. Image: CC jooray/Flickr

The Alternative Minimum Tax (AMT) was concocted in 1969 to eliminate tax loopholes for wealthy taxpayers. Since the AMT was created, it has only been adjusted for inflation twice. Each year more middle class taxpayers fall victim to the AMT, but Congress can’t agree on how to keep that from happening.

The AMT no longer serves its original purpose

The AMT was originally intended for taxpayers who made a whopping $200,000 a year in 1969 dollars. Many of these people, considered fabulously wealthy at the time, managed to avoid paying any federal taxes. More than four decades later, it’s the middle class who has to deal with the AMT because while the rest of the federal income tax system has been adjusted for inflation, the AMT hasn’t. For example, current tax brackets range from 10 to 35 percent. But the AMT brackets have stayed pretty much the same–from 26 to 28 percent. Thus, the AMT no longer serves its original intention of closing tax loopholes for the wealthy. Some people have to get a loan to pay their taxes, thanks to the AMT.

Welcome to the AMT nightmare

As if the AMT itself weren’t bad enough, the AMT forces affected taxpayers to do more confusing paperwork for the privilege of paying more taxes. The AMT adds another layer of rates and more restrictive rules for tax deductions. If a taxpayer’s taxable income rate falls below the “alternative minimum,” the nightmare begins. The AMT disallows or cuts tax breaks used every year by taxpayers to lower their tax liability. Some taxpayers have to go through the hassle just to find out they’ve escaped the AMT. It’s easy enough these days to hire an accountant or buy tax software, but the AMT adds those costs to tax preparation along with the increased tax.

Taxpayers affected by the AMT

About 27 million taxpayers will be affected by the AMT for 2010, according to the Congressional Budget Office. That’s one in six who will have to pay an average of $3,900 more in taxes. That could be you if your gross income is above $75,000 and you have a lot of personal exemptions and itemized deductions. If you exercised incentive stock options, report capital gains, own a business or rent properties, beware. You need to get IRS Form 6251, keep your fingers crossed and fill it out. Best of luck.

Sources

InvestorGuide

BankRate

Investopedia

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