Beware Alternative Minimum Tax's Bite
A type of income tax designed to help assure that the rich pay into the system is affecting an ever-growing number of middle-class taxpayers as well.
The "alternative minimum tax,"
In the third and final part of The Early Show's "Tax Tips" series Thursday, Gibbons told co-anchor Julie Chen the "AMT" was established in 1969, when officials realized that the very, very rich were managing to escape paying taxes altogether. The super-rich were taking advantage of so many deductions that they wound up not paying the government anything. The AMT was created to stop this. A lot of the deductions that taxpayers take for granted, such as deducting dependents, aren't allowed under AMT."
Currently, taxpayers figure out what they owe under the traditional tax system and under the AMT, and pay whichever is higher.
And we're hearing more and more about the AMT, Gibbons observes, because upper middle-class and middle-class taxpayers are now having to pay it, while very few rich people are. This year, about 4 million taxpayers will pay it but, if no changes are made to the rules, 19 million people will be hit next year. By 2010, 32 million will be affected.
Nobody wants to be hit by the AMT, Gibbons points out, because it results in a much higher tax bill. If you're impacted, you'll wind up paying anywhere between hundreds and thousands more dollars to Washington, depending on your individual circumstances.
Why are so many more people being affected?
The most basic answer, Gibbons says, is that the AMT guidelines don't adjust for inflation the way the regular tax code does. The AMT rules don't reflect the higher cost of living over the years. The majority of the people this year who will be snagged by AMT earn between $200,000 and $500,000. That was seen as a much larger income in 1969 than it is now. While incomes, housing prices, etc., have changed since '69, the AMT hasn't.
If laws don't change soon, the majority of households making $75,000 to $100,000 will fall under AMT. Anyone making over $75,000 is potentially vulnerable.Also, the 2003 and 2001 tax cuts have made the problem worse. "As regular tax bills have declined," Gibbons told Chen, "this actually raises the odds that your AMT bill will be higher."
People most likely to have to pay the AMT are ones who take the most deductions. People who live in states with high income and property taxes, such as New York or California, and who have several kids are most likely to be hit.
How do you know if you have to pay the AMT?
The majority of taxpayers have a professional prepare their taxes. This person will tell you if your bill is more under AMT and will make sure you pay it.
If you do your taxes yourself using tax prep software, the programs will automatically compute your taxes both ways and tell you if you have to pay the AMT.
If you're one of the handful of folks who still fills out the 1040 by hand, the IRS and other financial Websites have tools to help you figure out if you owe the AMT.
Unfortunately, there's not much you can do to avoid it, unless you're willing to take some drastic measures. You could move to a low-tax state; you could sell your big house and move to a smaller one, etc.
There are some small changes your accountant or tax preparer could help you make in your investment portfolio that may ward off the AMT if you're close to qualifying.
But if there is any good news here, it's that changes to the AMT may be coming.
Of course, the government likes people to pay the AMT because it brings in a lot of money. But, politicians know that Americans hate the tax, and are becoming more frightened of it. This is an election year, and pundits agree that Congress will be forced to do something to alleviate the AMT burden. In the meantime, lawmakers continue to pass annual "band-aid measures" that keep the tax from affecting the majority of taxpayers.