Tax Policy

Alternative Minimum Tax Creep

The alternative minimum tax -- designed to ensure that wealthy people pay at least some tax -- has been around since 1969. Throughout its history, it has affected relatively few people. But that is swiftly changing.

  • Although the tax affected only one out of every 150 taxpayers this April, it will affect one of every 14 by 2008.

  • About 46 percent of those who will be subjected to the AMT will have incomes between $50,000 and $100,000 -- with people who own their own businesses, live in a high-tax state or have lots of incentive stock options particularly vulnerable.

Under AMT, some people must figure their taxes twice -- under two different sets of rules -- and pay whichever tax is higher.

  • Also, under AMT rules taxpayers aren't allowed many deductions they would otherwise have -- such as those for state and local taxes.

  • However, married couples filing jointly are permitted a $45,000 and singles a $33,750 exemption.

  • What's left over is taxed at a 26 percent rate for income under $175,000, and 28 percent for incomes which exceed that.

There are several reasons for the creeping impact of the AMT. One is that it is not indexed for inflation. Another involves the increasing use of incentive stock options for employee compensation. Small-business owners who pay taxes as individuals are also at risk.

Source: Anna Bray Duff, "Another Tax Hike By Stealth?" Investor's Business Daily, June 30, 1998.

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