Here Comes the AMT
Will the runaway tax be stopped in time?
If your 2006 tax return is among the 3.5 million to 4 million that are projected to be hit by the alternative minimum tax, your only choice may be to grit your teeth. But don't feel neglected. Virtually everyone agrees that the AMT is out of control and needs to be fixed. The big question is how and at what cost in lost potential tax revenueroughly $1.2 trillion over 10 years if the AMT is totally repealed.
So far, Congress has enacted short-term boosts in exemptions from the tax to slow its expanding reach from only about 1.3 million taxpayers five years ago. If a new temporary or permanent fix isn't enacted for 2007, the number of returns affected could soar to 23 million.
Good intentions. The AMTis an auxiliary tax with fewer deductions than regular tax and kicks in if your tax figured under its formula is greater than your tax figured normally. It was originally aimed at upper-income taxpayers who were avoiding very large amounts of tax through shelters and other manipulations, and it was never intended to be the nuisance it has become.
A failure to index the AMT to inflation and reductions in regular tax are among factors now extending the AMT's reach to some middle-class families.
The original purpose of closing tax shelters has in fact become a much smaller factor in the AMT's impact. Large payments of property tax and state income tax can trigger the AMT since those items aren't deductible when figuring it. People with many dependent exemptions are also susceptible.
"You could just be a normal person living your life and fall into it," says Bill Stone, investment director at PNC Bank's wealth management operation.
The AMT can erase part of the benefits of tax reductions and the cut in the capital-gains rate.
Dealing with the AMT can involve planning the year in which to take certain deductions, timing the receipt of income, manipulating the type and amount of debt, and other arcane issues. The tax is fertile ground for selling tax software or professional help, since you may have to go through complex calculations to figure out if you are hit by it, and tactics to minimize or avoid it in the future can be fraught with gotchas.
But maybe for those already affected, and those who soon could be, this all will turn out to be a tax horror story with a happy ending.
This story appears in the March 12, 2007 print edition of U.S. News & World Report.