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PATCHING THE ALTERNATIVE MINIMUM TAX

By: Julian Block

THE TAX ADVISER

True, during the campaign, then-Senator Obama did not address the issue in detail, saying only that he would consider AMT reforms, such as indexing the AMT exemptions — that is, the amounts of income that escape this tax. Those amounts have never been indexed, whereas regular tax rates are indexed, as are the amounts allowed for personal exemptions and standard deductions. In reality, President Obama would have to do far more to temper the AMT, which snags a steadily growing number of middle-income individuals, forcing them to calculate their taxes both under the regular system and the AMT. And they are nicked for whichever levy is larger.

However, the American Recovery and Reinvestment Act of 2009, enacted this past February, authorized one of those temporary fixes for one year — the so-called AMT patches that raise the exemptions. The measure slightly increases the amounts for 2009 to $70,950 for married couples filing jointly and surviving spouses (up from $69,950 in 2008); $46,700 for single taxpayers and heads of household (up from $46,200 in 2008); and $35,475 for married couples filing separately (up from $34,975 in 2008).

On the plus side, the patch will keep many millions of taxpayers off the AMT rolls this year. The Tax Policy Center in Washington, a joint project of the Brookings Institution and the Urban Institute, estimates that whereas no patch would have caused 30.3 million taxpayers to be dunned for the AMT, the latest patch has decreased that number to 4.6 million.

But the legislation left unchanged the phase-out of exemptions when AMT income exceeds specified levels that vary by filing status — $150,000 for joint filers, $112,000 for singles and heads of household, and $75,000 for married couples filing separately. Moreover, nothing was done about the marriage penalties imposed by the AMT. “The exemption for couples is less than twice the level for singles, and the tax rate brackets are not adjusted for marital status,” notes the Tax Policy Center.

Remember, too, that state and local income and property taxes are among the itemized deductions that are not allowed for AMT purposes.

The AMT “affects large groups of middle-class taxpayers with no tax-avoidance motives at all, unless one considers choosing to live in a high-tax state or choosing to have children to be a tax-avoidance motive,” said Nina Olson, the IRS National Taxpayer Advocate, in an annual report to Congress. She characterized the AMT as “the poster child for tax law complexity.” Noting that a tax system must be transparent in order to be perceived as evenhanded, she added: “Yet the complexity of the AMT is such that many, if not most taxpayers, who owe the AMT do not realize it until they prepare their returns. It adds insult to injury when many of these taxpayers discover that they also owe a penalty for failure to pay sufficient estimated tax because they did not factor in the AMT when they computed their withholding exemptions or estimated tax payments.”
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