Tempo di Dire Arrivederci to the AMT

Tempo di Dire Arrivederci to the AMT

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The unintended, absurd tax quirks brought about by the application of the Alternative Minimum Tax in the 39 years of its rocky existence are too numerous to describe. But suffice it to say, the AMT has done more than any single tax provision in history to contribute to the tax code’s suffocating complexity and unwieldiness.

In 1968 the Johnson administration was desperate to find ways to fund the continuation and escalation of the Vietnam war. It was brought to LBJ’s attention that there were many wealthy people who were not paying taxes because they had availed themselves of certain tax preferences (i.e. loopholes) that were inadvertently built into the tax code.

In a piece written for the George Mason University’s History News Network titled How did the Present Alternative Minimum Tax Come Into Existence, Bonnie Goodman said,

The government needed to secure additional funds to finance the war which in 1968 and 1969 was at its peak. According to Sheldon D. Pollack in The Failure of U.S. Tax Policy: Revenue and Politics, the need for new revenues led the executive branch “to embrace a conception of ‘tax reform’ consisting in closing revenue ‘leaks’ and reversing the ‘erosion’ of the tax base concomitant to the many preferences that had crept into the tax code.”

But LBJ had made himself a lame duck by declaring that he would “not run and will not accept” his party’s nomination for President and passed the buck on tax reform to the incoming Nixon administration.

We believe that in justice to the next Administration that will take office within the next month and will have to live with and administer any legislation passed, it is only appropriate that they have the opportunity to examine carefully and make their judgments to these matters.

The AMT was enacted in 1969, after a proposal by Nixon, to respond to a perceived abuse of tax “loopholes” by rich folks, at the time defined generally as those who make over $200,000.00 a year. The idea was to make sure that taxpayer’s whose income exceeded that amount did not get away with paying little or no income tax.

The New York Times in a ’69 article described the new tax this way:

The [AMT] aims to foil wealthy people who arrange their affairs to escape taxation under the present law and everyone seems to think that’s a good idea.

Since it’s enactment, the AMT has been “reformed” six times. Once under Jimmy Carter, three times under Ronald Reagan, once under George H.W. Bush and once under Bill Clinton.

In a 2005 column titled Alternative Minimum Tax 101 – The AMT is meant for the rich but it’s the scourge of the middle class, Katie Benner of CNNMoney.Com, explained the problem as well as anyone can:

What defined uber-rich in 1969, when the AMT was first enacted, has never been adjusted for inflation. That means what made you affluent back then doesn’t now — but you’re still taxed like it does.

The Urban-Brookings Tax Policy Center says the AMT will hit 3.6 million out of the nation’s 131 million taxpayers filing for tax year 2005 (filed in early 2006), and could affect 31 million by 2010 if nothing is done.

To give you a sense of just who might get caught, this year only 1.8 percent of married couples with two kids and an adjusted gross income between $75,000 and $100,000 will be subject to AMT. Next year, that number jumps to 73.4 percent.

Rod Martin of Vanguard.Org in a column titled Abolish the Alternative Minimum Tax makes some of the best arguments I’ve heard yet for killing the AMT. Listen:

[The AMT] is a form of double taxation, which is a very big part of what ails our current tax system. Under no rational standard of fairness is it right to tax someone’s hard-earned income a second time.

If double taxation is immoral, AMT may well be the chief of sinners. It gives Uncle Sam a second crack at our wallets if our legal, fair-and-square deductions let us keep “too much” of our own money.

The whole scheme is utterly outrageous and downright Orwellian. If your deductions are taken legally, and Uncle Sam doesn’t like the result, the rules change and you pay more. In other words, the government giveth, and the government taketh away. And it giveth and taketh your own money.

But not everyone thinks ditching the special tax is a good idea. Michael Kinsley, in a column he wrote for the Washington Post, In Defense of the AMT, argues that it might be more fair to use the AMT system instead of  the regular tax system.

What do you think about the AMT?  Should we tweak it a seventh time? Or is time to say goodbye?

I would love to hear what you think.

About Peter Pappas

Peter is a tax attorney and certified public acccountant with over 20 years experience helping taxpayers resolve their IRS and state tax problems.

He has represented thousands of taxpayers who have been experiencing difficulty dealing with the Internal Revenue Service or State tax officials.

He is a member of the American Association of Attorney-Certified Public Accountants, the Florida Bar Association and The Florida Institute of Certified Public Accountants and is admitted to practice before the United States Tax Court, the United States Supreme Court, U.S. District Courts - Middle District of Florida

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  1. Like Frankenstein in the old Hammer film – THE AMT MUST BE DESTROYED!

    The very existence of the dreaded Alternative Minimum Tax is a perfect example of Congress reacting to a situation rather than responding to a problem by dealing with its causes.

    If loopholes in the Tax Code caused the wealthy of 1968 to avoid taxes altogether then the answer is to close, or revise, the loopholes and not create a whole ‘nother tax system.

    The AMT has allowed Presidents and Congress to seem to provide tax relief to the middle class while they know full well that the AMT will negate much of the relief via the “back door”.

    The AMT discriminates against highly taxed blue states like New Jersey, New York and California, where income is artificially inflated due to a high cost of living.

    As I said in the beginning – THE AMT MUST BE DESTROYED!


  2. Robert, I couldn’t have said it better.

    Thanks for the comment.


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