April 26, 2006
AMT Sends Middle Class To ATM
It could be called the trickle down tax. The Alternative Minimum Tax (AMT), introduced in 1970 to ensure that wealthy scofflaws didn't avoid all tax liability through the use of tax shelters or by claiming excessive numbers of deductions, was originally aimed at a group of 155 people with incomes over $200,000 who paid no taxes in 1969.
While the majority of middle class taxpayers remain unaffected by the AMT (an estimated 3.5 million Americans paid the tax in 2005), the number is expected to grow to more than 33 million people by 2010 if the tax remains unchanged, according to projections by the non-partisan Tax Policy Center. And Long Islanders, thanks to higher-than-average incomes and state and local taxes that cannot be deducted under the AMT, will pay in greater numbers than the rest of the nation.
Senators Hillary Clinton and Chuck Schumer and Congressman Tim Bishop support a one-year relief provision from the AMT in the Tax Reconciliation Bill that is currently before a House-Senate Conference Committee. "The Alternative Minimum Tax is a stealth tax on the middle class that the Republican leadership of Congress refuses to address," Bishop said.
"New York already has the second highest percentage of AMT taxpayers in the country and without an adjustment, millions of middle class households will see their tax burdens suddenly increase," Clinton said in a statement released on April 17.
Should the AMT relief provision be left out of the bill, approximately 19 million Americans will face it in 2006. The number of taxpayers subject to the tax is growing because the AMT is not indexed to inflation, meaning that the cut-off income for the tax has decreased on a regular basis since the tax's inception.
The AMT is a 26% tax that is calculated by eliminating most deductions allowed under the regular income tax code, including deductions for state and local taxes, real estate taxes, dependent children, and the standard deduction, though it does preserve preferential rates for capital gains and dividends. This year, married couples filing jointly with incomes over $58,000 and single persons with incomes over $40,250 were required to calculate their tax liability under AMT. If the tax liability under the AMT calculation is higher than under the regular tax code, the filer must pay the difference.
"Since Long Island has high real estate taxes and high income taxes, the AMT has a large impact," said Glenn Ryzuk, an accountant based in Westhampton and Holtsville.
Ryzuk has been doing taxes since the 1980s and he said that prior to the 2005 tax year the AMT "very rarely came into play" for most of his clients. "Normally I would have a handful of people paying into AMT," he said. "This year 40% of my clients were paying."
By 2010, the Tax Policy Center estimates that 37% of households with incomes between $50,000 and $75,000 and 73% of households in the $75,000-$100,000 income bracket will be affected by the tax. Married couples will see a significant "marriage penalty" because the AMT excludes deductions for dependent children, making 85% of married couples subject to the tax by 2010, should current rules stay in place.
"It is no longer performing its function; it is now affecting middle income people," Ryzuk said.
Bishop agreed, noting that a long-term solution to the AMT needs to be found. "We should either repeal it or significantly change how it is indexed so it only affects those originally intended, high income earners," he said.
The most commonly suggested reforms to the AMT include indexing it to inflation and allowing for dependent deductions, thus ensuring that those in the lower income brackets will remain unaffected by the tax, while those with higher incomes will continue to pay.
Though relief from the AMT will likely be included in this year's Tax Reconciliation Bill, its long-term future remains uncertain because it is a significant source of tax revenue. Repealing the tax would decrease revenues by $660 billion over 10 years, according to the Tax Policy Center.
"Given the tax-cutting agenda of the current administration it would be enormously difficult to have sufficient monies to cover the rollback" of the AMT without significantly limiting other tax cuts, Bishop said.