Alternative Minimum Tax

Many congressional leaders have vowed to make the Alternative Minimum Tax (AMT) a centerpiece of this year’s debate. Claiming the tax is complex and inefficient, and unfairly threatens millions of middle-class families, fixing the AMT is a top tax priority for members of Congress. However, the substantial revenue loss to the federal government will make full repeal of the AMT difficult to achieve.
 
The AMT was signed into law in 1969 after the American public became outraged that 155 wealthy Americans escaped federal income taxes by taking advantage of numerous deductions. Thus it was created as a way to prevent high-income taxpayers from avoiding income tax payments. However, the failure to index the AMT for inflation has resulted in millions of Americans paying this onerous double tax. As a result, by 2010, one in three tax filers, or an estimated 36 million people, will be subject to the AMT.
 
Since 2001, Congress has patched the AMT one year at a time, primarily by increasing the exemption amount. Without the patch passed by Congress in October 2008, approximately 22.7 million additional Americans would have paid the AMT in 2008. Even with the 2008 patch, four million taxpayers were still affected—costing nearly $50 billion. However, getting rid of the tax altogether would be even more expensive—more than $1 trillion over the next decade.
 
The AMT is similar to a flat tax with two brackets, 26 and 28 percent, with fewer deductions. Taxpayers do not get credit for dependents, medical expenses, and state and local taxes. Instead, taxpayers get a single deduction—called the AMT exemption—which is currently set at $69,950 for married couples and $46,200 for singles. Taxpayers compute their taxes both ways and pay whichever amount is higher. This computation is harshest on taxpayers with annual incomes of $100,000 to $500,000, where approximately 3.5 million of these households paid the AMT in 2005. Because many small businesses are pass-through entities, their business income is reported as personal income, subjecting increasing numbers of small-business owners to this complex tax.
 
The AMT has an extraordinarily expensive compliance cost relative to the revenue that is generated from the tax. While consensus is moving toward a simpler tax filing system, the AMT acts in quite the opposite manner, forcing families and businesses to fill out two forms, which adds approximately six additional hours of tax preparation time.
 
NSBA urges full repeal of the AMT, or alternatively, recommends changes to lessen the impact on middle-income taxpayers. It is time to stop this stealth tax and look for longer-term solutions that are actually financially feasible.  
 
 
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