NCPA - National Center for Policy Analysis


February 28, 2005

Valuable tax deductions have vanished for many households because they are forced to pay the alternative minimum tax, writes David Leonhardt of the New York Times.

The tax, once meant purely for very wealthy families, is now striking those making $75,000 to $250,000 annually who claim relatively high tax deductions, such as property taxes, state and local income taxes, and personal exemptions for children. When the tax applies, it effectively cancels some of those deductions:

  • Shrinking deductions have the potential to dampen price increases in thriving real estate markets, such as in the Northeast and on the West Coast.
  • Left unchanged, the alternative minimum tax would produce more tax revenue by 2009 than the ordinary federal income tax.
  • In five years, 30 million taxpayers are likely to pay the alternative minimum tax, many of them concentrated in high-tax states.

Part of the problem is that the triggers for the alternative tax have not kept up with inflation, causing it to capture many people whose main deductions come from nothing more exotic than children and local taxes.

Many of the families who have already been hit by the A.M.T. make enough money that its cost is not a hardship. Barring a change, though, the tax will cover more than half of all households with incomes of $75,000 to $100,000 five years from now, the Tax Policy Center forecasts. Nearly all families who have children and make more than $100,000 would fall into it. Many would lose some or all the tax cuts they have received since President Bush took office, says Leonhardt.

Source: David Leonhardt, "Case of Vanishing Deductions: Alternative Tax Called Culprit," New York Times, February 21, 2005.

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