How Big a Problem Is the AMT?
None of the CPAs from Oklahoma described the AMT in the stark terms used by the Taxpayer Advocate’s report. Looking at how the AMT affects exemptions the report said, “When Congress first enacted a minimum tax in 1969, the exemption amount was $30,000 for all taxpayers. If that amount had been indexed, it would be equal to about $165,000 today. Instead, the exemption amount, after a temporary increase that will expire after 2006, is $45,000 for married taxpayers and $33,750 for most other taxpayers. As a result, it is now projected that in 2010, 32.4 million individual taxpayers – or 34 percent of individual filers who pay income tax – will be subject to the AMT.”
Kent L. West, who owns an accounting firm in Mooreland, Oklahoma has seen the number of his clients affected by the AMT increasing every year. During the 10 years West has been in practice, of the 1,600 individual returns he prepares annually, the number of AMT filers has jumped from 1 or 2 to 70.
“The AMT was designed for people with tons of deductions who were not paying any taxes, West says. “Now it hits people with high state tax deductions, children and a home. If a small business owner has royalty income, depreciation can trigger the tax.” Taxpayers are also troubled, West says, because the AMT is not easy to calculate.
Alone of the four Oklahoma accountants, West sees a solution in revamping the AMT as it stands. “Like the estate tax, the AMT needs to be raised to reasonable income levels and indexed to inflation. But I’m not optimistic that anything will be done until after the 2008 election,” he says.
Only ten of Basker Johnson’s clients in a practice in Sapulpa, Oklahoma a town of 25,000 people 20 miles from Tulsa, have fallen into the AMT and that is because of a special situation, usually a large capital gain on the sale of real estate, or in one case the realization of $1 million from the sale of bank stock when the bank was sold. Johnson prepares 600 individual returns for clients with adjusted gross incomes of $50,000–$70,000.
“The AMT was a noble experiment at the time it was created, Johnson says, “but it has created two tax systems and has made it unnecessarily difficult for people to know when they may be subject to the tax,” he says.
Johnson sees the AMT issue as evidence that the whole system of deductions needs to be remapped. A self-proclaimed contrarian, he agreed with the President’s tax panel that the home mortgage deduction should be eliminated. He even questions the rationale for the deduction for charitable contributions. Johnson rejects the flat tax as a solution because it will not likely yield sufficient revenue.
Like his colleagues, Henry M. Bickerstaff, Partner, Kennedy & Coe, LLC in Alva, Oklahoma is troubled that the AMT in effect has created two tax systems and has added to the complexity of an already complex system. “We have an unmanageable tax system,” Bickerstaff says, but holds out little hope for any major changes in the near term.
J. Fred Imel, President of James F. Imel, PC in Yukon, Oklahoma doesn’t think the AMT is all that bad. Arguing that the AMT is a back door flat tax, Imel says that to the extent that the tax was meant to address deductions, it continues to do what was intended. “Congress has determined the level of deductions that is appropriate for taxpayers within a certain income range. The AMT prevents taxpayers from taking more deductions than Congress has deemed are reasonable,” he says
In his 30 years in practice, Imel says, he has assisted two groups of clients, “those who have high incomes and those with very low incomes and no one in either group is currently subject to the AMT.”
Imel says that AMT rate is not that far from the rate paid by most middle income taxpayers who are not subject to the AMT. “For example, he says, a taxpayer who earns $120,000, a pretty good income, and owns a home and who has six children will be subject to the AMT but may end up paying only $160 in tax.”
The Taxpayer Advocate report suggests that married filers with two or more children and incomes between $75,000 and $100,000 in adjusted gross income will be especially hard hit and will end up paying much more under the AMT.
Calculating the AMT and anticipating its effects can be difficult, Imel admits, but most people who fall into the AMT income range can afford a tax consultant. One group who may be affected this year would be taxpayers who took advantage of the gains in the stock market by selling stock in December.
Henry Bickerstaff recalled the 1986 tax simplification law, which had just two rates, 15 and 28 percent. “The two rate-system lasted only one year and look at what we have now,” he says. The AMT becomes fixable when the people who are affected by it vote – make themselves heard in Congress.”
“We live in a complex society with a complex legal system, Imel says, “and it is reasonable to expect a complex tax system.” But like Birkenstaff, Imel remembers the
Reagan-era Tax Simplification Law and how short-lived that simplicity was.
Messrs West, Johnson and Imel also participated in a discussion of the Tax Gap, the second biggest taxpayer problem identified by the Taxpayer Advocate, which will be covered in a separate report.