Alternative Minimum Tax "Monster"
April 5, 2011
Congress created the Alternative Minimum Tax (AMT) in 1969 to prevent 155 wealthy taxpayers from using deductions and credits to avoid paying any federal income taxes, says Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University.
Here's how it works.
- Taxpayers subject to the AMT must calculate their tax liability twice: once under regular income tax rules and again under AMT rules.
- If liability under the AMT proves higher, taxpayers pay the difference as an add-on to the regular tax.
- The difference paid is their AMT.
When the regular income tax was indexed for inflation in 1981, however, Congress failed to index the AMT. So the AMT's reach has expanded over time to hit middle-income people it was never intended to tax. As a result, the AMT affects a growing share of the population. And it could get worse.
- According to the Congressional Budget Office, last tax season 4.5 million taxpayers were affected by the alternative minimum tax, an increase of more than 4 million taxpayers since 1970.
- Until 2000, less than 1 percent of taxpayers paid the AMT in any given year; by 2008, 3 percent of taxpayers were subject to the AMT.
To add insult to injury, taxpayers also have to deal with what's called the "real bracket creep."
- Bracket creep occurs when taxpayers get an increase in wages, salary or other income that moves them into a new tax bracket and makes them subject to the AMT.
- For instance, because the AMT is not indexed for inflation, income growth (which, due to inflation, is not necessarily accompanied by an increase in the standard of living) tends to raise the AMT liability more than regular income tax liability.
- This phenomenon is especially pernicious in places with a high cost of living.
Source: Veronique de Rugy, "Slay This Tax 'Monster'," The American, April 2, 2011.
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