February 2005  Email this  Print this
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AMT
It Could Happen to you
by Mary Beth Franklin
Thirty-five years after it was created to backstop the income tax so that wealthy Americans paid at least a pittance in taxes, the alternative minimum tax is rapidly morphing into a mass tax. Nina Olson,
the IRS's national taxpayer advocate, calls the AMT "the most serious problem facing American taxpayers." This year, three million of us (up from about 130,000 in 1990) will find ourselves in a parallel universe, where common tax breaks -- including deductions for state and local taxes and home-equity-loan interest, and write-offs for the cost of tax and investment advice and for the value of personal exemptions for ourselves and our kids -- simply don't exist. Unless Congress acts, 30 million people -- one in four taxpayers -- will be living in AMT land by the end of the decade. Theoretically, all taxpayers are subject to the AMT, but you pay it only when your AMT liability exceeds your regular tax bill. That means figuring your taxes twice -- once under the regular rules and again under the AMT rules. Ironically, as regular tax bills shrink, thanks to the tax cuts of 2001 and 2003, the chances that your AMT bill may be higher increase. In a very real sense, the AMT can sneakily taketh some of what the tax cuts giveth.
In most cases, the AMT adds several hundred to a few thousand dollars to a tax bill. But the AMT has smacked some unfortunate souls with bills of hundreds of thousands of dollars -- often many times their annual income -- because of an AMT tenet that taxes paper profits when stock options are exercised rather than when the stock is sold. For such victims, who saw phantom profits disappear during the tech wreck of 2000-02 but who were saddled with enormous AMT debts, the past five years have included a string of financial disasters, from garnished wages to tax liens and bankruptcies.
Although Olson and others have called for the AMT's repeal, it would be a costly proposition. As things stand now, by 2008 it would cost the government less to repeal the regular income tax than to pull the plug on the AMT. The brewing crisis is sure to play a starring role as President Bush's drive for fundamental tax reform unfolds. In the meantime, take this guided tour of the strange new world you may soon inhabit.
Funny, I don't feel rich
Gary Gunther, 49, of Annapolis, Md., makes a comfortable living as a defense contractor with a low six-figure salary. But with nine kids and a stay-at-home wife who home schools them, the Gunthers are by no means wealthy. So Gunther, who prepares his own taxes, was surprised in 2002 to discover that the family owed the AMT. The route to that verdict was an arduous one. Gunther first filled out a 12-line worksheet to determine if he might be subject to the AMT. Then he had to plow through eight pages of instructions and complete a 65-line form to know for sure. That first year, Gunther did the calculations by hand. Now he uses tax-preparation software.
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