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The Alternative Minimum Tax is "the poster child for tax law complexity" and the number one problem facing U.S. citizens.
That statement is part of the latest annual report submitted to Congress by Nina Olson, the IRS National Taxpayer Advocate.
"The AMT is a parallel and complex tax structure that is imposed on top of the regular tax structure," the report states. "While the AMT was originally designed to prevent wealthy taxpayers from escaping tax liability through the use of tax-avoidance transactions, it now affects large groups of middle-class taxpayers with no tax-avoidance motives at all."
For example, today's AMT punishes taxpayers for engaging in behavior such as:
- Having children because the AMT disallows the personal exemptions that parents are allowed to claim under the regular tax rules.
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More AMT Facts |
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It is now projected that in 2010, 32.4 million individual taxpayers (or 34 percent of individual filers who pay income tax) will be subject to the AMT. This is up from just over 2.4 million in 2003. |
| It is estimated that the average AMT taxpayer will owe an additional $6,782 in tax in 2006. |
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— Source: National Taxpayer Advocate's Report, submitted to Congress on December 31, 2006 |
- Living in a high tax state because the AMT disallows the deduction for the payment of state and local income, sales, and property taxes that taxpayers are allowed to claim under the regular tax rules.
A growing number of taxpayers are becoming liable for the AMT every year because the amount of income exempt from the tax is not indexed for inflation. When Congress first enacted a minimum tax in 1969, the exemption amount was $30,000 for all taxpayers. If that amount had been indexed, according to the report, it would be equal to about $165,000 today. Instead, the exemption amount, after a temporary increase that will expire after the 2006 tax year, is $45,000 for married taxpayers and $33,750 for most other taxpayers.
The AMT calculations are extremely complicated. Essentially, you determine your tax liability under regular and AMT rules and pay the higher amount. You add back many items that are deducted or excluded from regular income taxes. AMT rates run from 26 percent to 28 percent, compared with 10 percent to 35 percent regular tax rates.
The Taxpayer Advocate argues that a tax system must be transparent in order to be viewed as fair. "Yet the complexity of the AMT is such that many, if not most taxpayers, who owe the AMT do not realize it until they prepare their returns. It adds insult to injury when many of these taxpayers discover that they also owe a penalty for failure to pay sufficient estimated tax because they did not factor in the AMT when they computed their withholding exemptions or estimated tax payments."
When taxpayers are subjected to this type of treatment, they may wonder whether if the government has dealt fairly with them. "To say the least, 'gotcha' taxation is not good for taxpayers or the tax system," Olson writes in her report.
The National Taxpayer Advocate recommends that Congress repeal the provisions of the Internal Revenue Code that pertain to the Alternative Minimum Tax for individuals.
Olson has made similar strong warnings in the past. The National Taxpayer Advocate designated the AMT as the most serious problem facing taxpayers in her 2003 report and she has recommended it be repealed on several occasions. Although Congress has passed some temporary "patches" that keep some taxpayers from being hit with the AMT, lawmakers have not come up with a permanent solution to the problem.
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Contact us if you have questions about the AMT. In some cases, you can avoid AMT exposure by planning ahead. Even if you're liable for the tax, there may be ways to lower your tax bill now and in the future. Our professionals can help you with this complex issue. |
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