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FEBRUARY 16, 2004
It's Time To Fix The AMT Ouch. That's what 3 million upper-middle-class families are going to say by Apr. 15 when they discover they owe thousands of extra tax dollars thanks to the pernicious AMT -- the alternative minimum tax. What President George W. Bush has given in the form of lower taxes on income, dividends, and capital gains, the AMT stealthily takes back -- at least one-third of it. Worse than undermining the tax cuts, the AMT also undermines the tax code itself. It is maddeningly complex, largely hidden, blatantly unfair to many, and threatening to spread to some 33 million other taxpayers by the end of the decade. It's time to fix the AMT and not just patch it for a year, as the President is proposing in his new budget. It is certainly true that the people currently paying the AMT can probably afford it. Half of all taxpayers who made $200,000 to $500,000 in 2003 will have to pay an average of nearly $6,000 extra on their 2003 returns. And 9% of those who took in between $100,000 and $200,000 last year will have to come up with nearly $3,000 extra. That's not ruinous. Yet the AMT drives people crazy. Why? Under the AMT, people in the same tax brackets with different types of jobs can wind up paying different amounts of federal taxes. Unreimbursed business expenses, for example, that may be deductible under 1040 rules become nondeductible under the AMT. A salesperson with these expenses will pay higher federal taxes than a colleague who works in the same industry in the same city making the same income. People also may lose deductions for state and local taxes. So families living in highly taxed California and New York are likely to be pushed into the AMT. Then there is the havoc the AMT wreaks on rational tax planning. If families are paying regular income tax, they usually want to lower their taxes by taking deductions immediately and postpone income such as bonuses. But for those facing the possibility of paying a higher AMT who want to avoid it, the opposite strategy may be the right course. The AMT was first implemented 1969 to squeeze some tax revenues out of 155 millionaires who paid none. But while regular income taxes adjust brackets and personal exemptions for inflation, the AMT does not. As incomes rise, more and more people are being caught in the AMT net. Right now, only the upper middle class is hit with it. Sure, it's probably fair for some people making $600,000 and paying taxes at only a 25% effective rate to pay the AMT's 28%. But the AMT will soon infuriate millions of regular middle-income families unless President Bush and Congress find the courage to fix it. At the very least, the AMT should be indexed to inflation, making it consistent with the rest of the tax system and reducing its bite on the middle class. The American taxpayer is entitled to a clear, simple, and consistent tax code.  Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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