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AMT
It Could Happen to you
(Page 2 of 4)
by Mary Beth Franklin
Gunther estimates that the AMT added $2,500 to his 2002 tax bill and about half that much in 2003. He's gritting his teeth anticipating this year's AMT verdict.
Why is he subject to the fat-cat tax? Because he lives in a high-tax state and has a large family. All the income and property taxes the Gunthers deduct on their regular federal income-tax return boomerang to the bottom line for AMT calculations. So do his 11 personal exemptions -- one each for him, his wife, Mary, and their nine children, who range in age from 1 year to 16. That's $34,100 that comes off his taxable income under the regular rules but gets taxed at 26% by the AMT.
"Less money in our pocket means less money to spend on our kids," says Mary, who, like her husband, is a former naval officer. "Although Gary makes a pretty good salary, we don't live an outrageous lifestyle." The family moved in 2001 into Mary's childhood home across the Severn River from the Naval Academy after living all over the world on military posts. "We drive two beat-up cars, and we don't own a yacht," she says.
Michael Kitces, a financial planner in nearby Columbia, Md., says more than half of his clients are vulnerable to the AMT -- primarily because the state and local tax deductions and personal exemptions that cut their regular tax bills disappear under the AMT. And because they're in the same boat year after year, there's really no way for most of them to avoid the AMT by delaying or accelerating certain tax payments or income.
"Once people cross the threshold and wind up paying the AMT, there's not a whole lot they can do to get out of it," Kitces says. "They are going to stay in AMT land until Congress changes the law."
As the AMT storm gathers, Congress seems reluctant to act. Last fall, lawmakers temporarily raised the AMT exemption -- a sort-of super standard deduction that taxpayers subtract from bloated AMT income before applying the tax (26% on the first $175,000, and 28% on any excess). For 2004 and 2005, the exemption is $58,000 for married couples and $40,250 for single filers. But in 2006, the amounts are scheduled to drop back to $45,000 and $33,750. (If the original $30,000 AMT exemption had been indexed for inflation back in 1969 when the law was enacted, it would equal about $150,000 today.)
"We have a stay of execution, but we're still on death row," says Linda Carlisle, a partner with the White & Case law firm, in Washington, D.C, and a former Treasury Department official. "By 2010, the AMT will be a real taxpayer issue, but you can't wait until 2010 to fix it." Calling it a "cards and letters" topic, Carlisle predicts Congress won't act to do anything about the AMT until the public starts to complain loudly.
That's the kind of pressure that prompted Congress to create the AMT in the first place. According to one report, lawmakers received more mail in 1969 over a study that discovered that 155 taxpayers with incomes of $200,000 or more (about $1 million in today's dollars) had escaped paying income tax in 1966 than they received about the Vietnam War.
In 2003, about 600 Americans with incomes of $1 million or more avoided paying any income or AMT tax, according to the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution. Yet the AMT is alive and well, and trickling down into the middle class. The center projects that by 2010, more than half of AMT taxpayers will have incomes of $100,000 or less -- up from about 9% today. For now, the majority of people paying the AMT have incomes between $100,000 and $500,000 (see the box on page 85 to find out whether you're threatened by the AMT).
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