Print

Email story

Comment

Email editor

The tax trap

Originally aimed at wealthy people who avoided paying taxes, thealternative minimum tax today is snaring more middle-class families.

Do not include any interest paid on the part of the balance of the new mortgage that exceeded the balance of the original eligible mortgage immediately before it was refinanced . . .

Though not the lilt of poetry, that verse is appropriate for today's tax filing deadline. The perplexing words come from IRS Form 6251, which is all too familiar to a growing number of Americans. It means you've been snagged by the alternative minimum tax, or AMT.

When it was adopted in 1969, the AMT was aimed at a couple hundred rich folks who used loopholes to avoid paying taxes. Under the alternative tax, different rules and rates apply. But this is the bottom line: You end up owing the IRS more. Because the AMT wasn't indexed to inflation, it has swept up ordinary taxpayers, particularly those with large deductions for dependents and state taxes.

President Bush and Congress acknowledge this is an unintended consequence of the AMT law, but neither has proposed a fix. While Bush pushed tax cuts that favored the wealthy, he was conveniently vague about the AMT, which will increasingly burden middle-income families.

Those at the lower end of the AMT could be excused by raising the income threshold or allowing certain exemptions. The cost in lost tax revenues could be made up by allowing the temporary tax cuts over the past few years to expire.

Yet Bush has essentially precluded such an outcome. As he seeks to "simplify" the tax code, Bush has instructed his advisory committee to ignore the hundreds of billions of dollars it will cost to make the current tax cuts permanent, but to force any other tax changes to be revenue neutral. So attempts to limit the AMT would have to be made up with equal tax increases elsewhere, which isn't likely.

In short, Bush once again has chosen relief for those who are most able to afford higher taxes at the expense of those less able.

Meanwhile the AMT will soon grow like the blob from outer space, swallowing up taxpayers who never saw it coming. While fewer than 3-million people were subject to the AMT in 2002, that number will balloon to 36-million in 2010, according to an analysis published in the Journal of Economic Perspectives . "Without reform, virtually all upper middle-class families with two or more children will be paying the AMT by decade's end," said the authors, Leonard E. Burman, William G. Gale and Jeffrey Rohaly. By then, taxes collected under the AMT will account for a larger portion of the nation's revenues than the regular income tax.

It is difficult to plan for the AMT; even accountants say you have to fill out the tax forms to know if it applies. And most Americans don't have the financial flexibility needed to avoid the alternative tax.

Those who filed returns that didn't trigger the AMT this year shouldn't celebrate too much. One day soon, your savings under the Bush tax cuts could be making the round trip back to Washington.

[Last modified April 15, 2005, 00:49:17]