Alternative minimum tax to ensnare millions
Congress' failure to address a rising problem for middle class taxpayers leaves many in line for a nasty shock.
Published December 14, 2005
WASHINGTON - Congress won't address the growing reach of the alternative minimum tax this year, leaving more than 15-million individuals and families subject to its bite for the first time next year.
Senate Majority Leader Bill Frist, R-Tenn., said Tuesday that legislation addressing the alternative minimum tax won't be completed this year. Lawmakers can act next year to make retroactive changes that ensure taxpayers don't pay more for 2006, but millions will start the year in its grasp.
The alternative minimum tax, designed to stop the wealthy from avoiding taxation, threatens more middle class taxpayers every year because of inflation. The number of individuals and families opening their wallets to an alternative minimum tax liability is projected to jump from roughly 3.5-million this year to nearly 19-million next year. The changes would apply to 2006 tax returns filed in 2007.
Taxpayers can get caught by the tax if they have a lot of long-term capital gains, exercise incentive stock options or take certain deductions, exemptions or credits that cannot be claimed under the AMT. Families claiming a lot of dependents can be affected because personal exemptions aren't counted for the AMT. The AMT has the biggest effect in states that have high state and local income taxes.
Congress regularly erects barriers against the tax to prevent inflation and recent tax cuts from pushing middle class families onto the alternative minimum tax rolls. The most recent patch holding back the tax expires Dec. 31.
The House and Senate passed separate bills applying a temporary fix on the problem next year, reducing taxes for those affected by roughly $30-billion.
Those bills have gotten stuck in a broader debate over tax policy, specifically a GOP effort to prevent tax cuts for capital gains and dividends from expiring at the end of 2008.
The investors' tax cuts have been the priority of Republican leaders, who hold out hope that Congress could pass an extension before lawmakers break for the holidays.
Democrats say Republicans have their priorities wrong.
"We should fix the AMT for 2006 and work to address it permanently before even thinking about cap gains," said Sen. Max Baucus, D-Mont.
The expiration of the temporary patch means nearly 19-million individuals and families can expect to pay the alternative minimum tax next year. More than 15-million taxpayers would face the alternative minimum tax for the first time, most of then married couples.
The alternative minimum tax exists as a second system of taxation that forces some individuals and families to figure their taxes twice and pay the higher amount.
It's frequently criticized, and a presidential panel on tax reform has said it should be abolished.WHAT IS THE AMT?
The alternative minimum tax was created in 1969 to ensure that a relatively small number of wealthy people did not use loopholes to avoid paying taxes. But it is increasingly being applied to families with incomes of $75,000 to $250,000 a year who claim relatively high deductions - like the ones for property taxes, state and local income taxes - and the exemption for children. When it applies, it cancels some of those deductions. The AMT effectively sets up a parallel tax system for all households, in which few deductions are allowed. Taxpayers whose alternative tax is higher than their regular federal income tax must pay the alternative one.