Four senators are hoping to eliminate the alternative minimum tax, which one lawmaker termed a “tax dragnet” that is ensnaring more middle-class taxpayers every year.
The alternative minimum tax, or AMT, was created in 1969 to stop wealthy Americans from avoiding taxes, but over time it has been applied to taxpayers with many children or those who live in states with high income and property taxes, the Associated Press reported. The AMT requires figuring taxes both the traditional way and under the AMT system, with taxpayers paying the higher amount. The AMT has fewer tax breaks and higher rates.
USA Today reported that the AMT raised the tax burden on nearly 4 million taxpayers this year, and is estimated to affect 20 million by 2006.
Single people with taxable income above $40,250 and married couples with income above $58,000 may be hurt by the AMT if they have numerous deductions; a calculation is done to determine whether they should be paying more than their regular income tax.
“The narrowing of the differential between AMT and regular tax rates results in the AMT being a ticking time bomb for 'ordinary' taxpayers with few or no AMT preferences or adjustments,” said Tom Purcell, chair of the AICPA Tax Executive Committee, in a statement. “Furthermore, the complexity of this tax is beyond what many affected taxpayers can cope with on their own,” he said.
Sen. Charles Grassley, R-Iowa, who chairs the Senate Finance Committee, and Sen. Max Baucus of Montana, the committee's top Democrat, introduced the bill with John Kyl, an Arizona Republican, and Oregon Democrat Ron Wyden, who called the AMT a “tax dragnet.”
"We're saying, in our bill, is that this ought to be at the top of the list in terms of tax reform," Wyden said.
The AICPA supports repeal, not only of the individual AMT, but the corporate AMT as well. Purcell said that like the individual AMT, the corporate rules require businesses to keep two sets of books and has the “perverse effect of taxing struggling or cyclical companies at a time when they can least afford it.”
Congress has passed temporary measures to keep the AMT from affecting middle-income families, but the senators want a permanent answer. Their bill, estimated to cost $611 billion over 10 years, would repeal the tax at the end of the decade. The House is also considering a repeal bill.
President Bush's tax panel, appointed to make recommendations on simplifying the tax code, has said it would urge eliminating or changing the AMT, but members have warned that repeal could mean making other unpopular changes, such as lowering deductions for mortgage interest, charitable giving or health care costs.
"It's not an easy task," John Breaux, the vice chairman and a former Democratic senator from Louisiana, told USA Today. "There's not a lot of unpopular tax breaks." The panel's final report is expected in late July.