By DAVID WESTPHAL
January 02, 2006
Because Congress has not yet intervened, the number of taxpayers affected by the Alternative Minimum Tax could soar to 20 million or more. Many of the new victims could see their federal tax burdens grow by several thousands of dollars.
Congressional leaders say that will never happen, pledging that the House and Senate will pass remedial legislation early next year limiting the growth of this surtax to a much smaller number. But there's no assurance this will occur, in part because some in Congress have other priorities, such as pushing tax preferences for capital gains and dividends.
As a result, there's at least a chance that millions of Americans are in for a rude awakening on the tax front, and that some of them won't find out about it until they file their returns in 2007.
Maggie Doedtman, a tax preparation expert for H&R Block in Kansas City, Mo., says the Alternative Minimum Tax constitutes a major surprise for a growing number of taxpayers.
"People think of this as something that should just not happen to them," says Doedtman. "Even if Congress does another short-term patch, the number of people affected by this will continue to grow."
Becoming subject to the Alternative Minimum Tax can be downright disagreeable. The average tax per AMT payer was about $4,000 last year, and it's not unusual for first-time payers to take a four-figure hit.
The fact that nearly 4 million taxpayers are expected to find themselves subject to the AMT for 2005 is a far cry from what creators of the tax intended a quarter-century ago. The parallel tax system was aimed at a few hundred Americans who were using multiple tax write-offs to avoid paying any federal income tax.
The AMT addressed the problem by eliminating major categories of tax deductions such as state and local taxes, health costs and personal exemptions, then recalculating tax liability under a different formula. In the early years only a few Americans saw their tax bill go up as a result of the AMT.
But, unlike the main tax system, the AMT was never indexed for inflation. As a result, its reach has gradually grown, and would have expanded even faster but for temporary fixes by Congress in recent years. Now, with Congress failing to act on a patch covering the 2006 tax year, millions enter the new year unable to predict their federal liability.
According to the Congressional Budget Office, the AMT hits hardest on those with adjusted gross income of $100,000 to $500,000. Already, well over half the families and individuals earning $200,000 to $500,000 are taxed under AMT, the CBO said.
But the new AMT targets aren't just the affluent. In recent years the surtax has affected those in increasingly lower income brackets, in some cases for the simple reason that a large family is unable to use its multiple personal exemptions under AMT. About 10 percent of tax returns showing incomes of $75,000 or less are now subject to the tax, according to the IRS; by 2010, that number is projected to exceed 20 percent.
Political leaders vow that won't happen.
"What we want to do is make sure that it doesn't hit more middle-income Americans," said Scott McClellan, President Bush's spokesman. Republican Sen. Charles Grassley, chairman of the Senate Finance Committee, has vowed to get AMT relief "enacted into law."
But there's no guarantee that will happen, or that Congress will find the money to fully fund it.
For one thing, the cost of making these temporary patches is growing rapidly, to roughly $30 billion in 2006. Between 2005 and 2010, tax revenue generated by the AMT is projected to increase five-fold, dimming hopes for eliminating the tax.
Perhaps as important, some see the Alternative Minimum Tax as leverage for achieving higher priority aims. Republican leaders in the House, for example, omitted an AMT fix from their prime tax-cut measure this year in favor of a provision extending lower rates on capital gains and dividends. (They then advanced the AMT legislation in a separate measure, though it stalled in the waning days of December.)
Some Republicans hint that permitting a rapid expansion of the AMT bite might also build support for a more fundamental overhaul of the federal tax system.
"Might it not help the momentum on tax reform if a few more people fully understood the impacts of AMT?" said Rep. Bill Thomas, chairman of the House Ways and Means Committee.
Sooner or later, many people think the AMT ultimately will force such as a reckoning. By 2013, according to one scenario, the AMT will be collecting more tax revenue than the regular tax system.
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