The Alternative Minimum Tax: Watch Out!
If a few of you may have a sense of deja vu with the title of this post, you're right, I've been here before, specifically The Alternative Minimum Tax: Be Afraid, VERY Afraid. way back in December of last year. Another recent article in the NY Times has brought this to the fore again, with Tax Break Expired, Middle Class Faces a Greater Burden for 2006 and this has but again gotten me a bit riled up.
The Alternative Minimum Tax, or AMT for short, was put in place back in 1969 to catch taxpayers who were making what today would be over $1 million dollars in income, at that time it was $200,000, and who were otherwise managing to legally avoid paying federal income tax. The problem with the AMT took some time to rear its ugly head and we're now to the point where it's making a full frontal display unless congress does something about it. The fact is that the AMT is not indexed to inflation, so while the original intent of the tax was to snare the richest taxpayers who were avoiding taxes, it's now creeping down into the pockets of upper-middle to middle class families who are making what would be deemed a "comfortable", but hardly "rich" wage. From the Times article:
Unless Congress takes action, one in four families with children — up from one in 22 last year — will owe up to $3,640 in additional federal income tax come next April.
Few of them realize that their taxes have increased, because Congress has not voted to raise taxes. Instead, Congress let a tax break expire. That break limited the alternative minimum tax, which takes back part of the tax cuts sponsored by President Bush.
To put this in a starker light:
The A.M.T. will cost Americans who earn $50,000 to $200,000 nearly $13 billion more next April. That is about how much people who earn more than $1 million will save because of the break on investment income like dividends and capital gains.
So what this means is that while the rest of us in the middle class get to pay more tax via the AMT, the rich get that money back through the tax break that Bush wants to extend for dividend, i.e. UNEARNED, income. Let me clarify, "earned" income is what you make when you are paid for your skills, labor, talent, or the simple sweat from your brow that you exert to obtain a wage. Unearned income is what you get from your bank account interest or the investments you make that provide a return for your money, but that return has nothing to do with anything you do other than how wisely you chose your investments. In this country, or at least with this administration, it's considered fairer that one should be taxed higher for their earned income over their unearned income, mostly because it's expected that the rich, by and large the largest beneficiaries of this largess, will take that money and plow it back into the economy and create more jobs. Alas, it's not very clear where good jobs are going to these days, and if one were to look at where a good number of new jobs are created it's not here but somewhere in Asia, so there's a huge question as to whether the American taxpayer is getting much benefit out of this tax break for the rich, or nearly the benefit that this administration would like one to believe is the result.
With the AMT deductions such as for children and paying state and local taxes evaporate. If you fall within the window of the AMT you have to figure your taxes out using both a standard and an AMT basis and if the AMT number works out higher than the "standard" one, you're hit for the AMT tax. That the AMT was never meant for the vast majority of those within the zone of it matters not at all, and unless an another exemption is put in place, or better yet some sort of indexing to inflation that would keep the AMT as a tool against the well-to-do vice the middle class, then the average taxpayer who's making a decent wage can potentially find themselves a victim of the it.
I urge any reader potentially to be affected by the AMT to get in touch with your congressional representatives ASAP and let them know you want the thing done away with, or at a minimum indexed for inflation such that it remains in place to go after the audience it was intended for. That Bush wants to pass an AMT break extension is not to be trusted: he also wants to continue the dividend tax break for the rich and there's only but so much tax that can be cut and with the way things are looking now the difference in revenues in and out is being put on the middle class vice instilling a fair and equitable tax, for as much as this current system ever allows for one, for the rich.