Alternative Minimum Tax And Your Bottom Line

If the government goes over the "fiscal cliff," millions of households could see tax increases because of an obscure part of the tax code, known as the alternative minimum tax. Host Michel Martin talks with NPR Business Editor Marilyn Geewax about exactly what could happen and who would be affected.

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MICHEL MARTIN, HOST:

This is TELL ME MORE from NPR News. I'm Michel Martin. Coming up this week, Hindus all over the world are celebrating Diwali, the Festival of Lights, so we are going to check in with writer and cookbook author Anupy Singla about the food she's bringing to her holiday table.

But, first, we want to talk again about a part of the so-called fiscal cliff you'll probably be hearing more about. Now, the fiscal cliff, you might remember, is that package of automatic spending cuts and tax increases scheduled to go into effect at the end of the year if Congress and the White House don't agree on a deficit plan.

Well, our analysts have been saying that this will affect people from all walks of life, so today we're focusing on one of those tax increases that could cost middle-income taxpayers a lot, nearly $4,000 a year extra in taxes. That's because of a little piece of the tax code called the alternative minimum tax.

Here to tell us more about all this is one of the people we turn to often for guidance on matters of personal finance and the economy, NPR senior business editor Marilyn Geewax.

Marilyn, welcome back. Thanks for joining us once again.

MARILYN GEEWAX, BYLINE: Hi, Michel.

MARTIN: So the alternative minimum tax. Tell us, what is it?

GEEWAX: That is a federal income tax that was originally designed to hit hardest at the wealthiest people. It's really supposed to be a tax for the top one percent. It was created in 1969 when Congress took a look at the tax code and said, gosh, we've got an awful lot of deductions, things like the home mortgage deduction, and that's a nice thing for middle-class people, but it got to where the rich were able to take so many deductions that they weren't paying very much in taxes.

The problem was that, in the 1960s, we hadn't had a huge amount of inflation, so people weren't thinking that much about inflation. By the time you put it all together, salaries were rising. What was, you know, a $100,000 salary in the 1960s seemed like a giant amount of money. Today, you know, two schoolteachers are making that, so...

MARTIN: Two schoolteachers married to each other or a police officer married to a nurse could be making that.

GEEWAX: Right.

MARTIN: So...

GEEWAX: Here is the crazy thing.

MARTIN: Yeah. Give us - yeah.

GEEWAX: Well, let me explain. Here's kind of the nutty back story for how does this work. So, every year, they look at it and say, oh, my, we have to adjust this for inflation to move it up. The target range that Congress shoots for now - keep in mind, the country has more than 300 million people. What Congress wants this tax to apply to is about five million people, so they adjust it each year. They go back to the alternative minimum tax and apply what they call a patch. That is, they just adjust it for inflation and it should stick with five million.

But, every year, Congress gridlocks and they don't get to it in time and, this year, it's part of this giant cluster of problems that we call the fiscal cliff and we're getting closer and closer to December 31st and they haven't applied that patch yet.

So, if they don't - if they drop the ball here and they don't keep us off that fiscal cliff, 27 million more Americans are going to have to pay that.

MARTIN: And how deep does this reach into the middle class?

GEEWAX: If you're a couple with $75,000 in income, which is - we're talking about just-barely-getting-by middle-class people - but you have a home mortgage deduction, you have a couple of kids, you take deductions for that - it will hit you. About half of all the people who make between 75,000 and 100,000 will be affected by this and it could raise their taxes by many hundreds, even thousands of dollars.

MARTIN: We're talking to one of our money coaches, somebody we turn to for information on personal finance and the economy, NPR senior business editor Marilyn Geewax. She's talking about a little piece of the tax code that could really cost middle-income families some money. And, by middle-income, we're talking, she says, as low as $75,000 a year in income. It's something called the alternative minimum tax.

And wasn't this originally called the millionaire's tax?

GEEWAX: That's what it was supposed to be. Not for people who are...

MARTIN: Colloquially, I mean, it doesn't in the tax code...

GEEWAX: Right.

MARTIN: But it initially was supposed to be the millionaire's tax and now it's far from it.

GEEWAX: And here's the thing, Michel. This is one point I want to make about this. One thing that people really object to about this tax is who has a lot of deductions. It tends to be people who live in high-tax states because you take a deduction for your state and local taxes. Your house is more expensive if you live in New York or New Jersey or Washington, D.C.

MARTIN: Atlanta, Dallas.

GEEWAX: Yes.

MARTIN: Any major urban center.

GEEWAX: Center. So it's going to disproportionately hit black families with children living in an expensive city. You know, the people who live in big cities that are expensive tend to have more deductions because they have these higher costs, so it hits harder at them.

MARTIN: Why wouldn't groups like, for example, the Congressional Black Caucus, be taking this on? Because, presumably, many of their constituents are the very people who are affected by this, not to mention lawmakers with cities in these high cost areas.

GEEWAX: Right.

MARTIN: Why wouldn't they be taking this on?

GEEWAX: All of the lawmakers from expensive places duly note this. I mean, they're really upset about the fact that it hits people who live in cities harder than it does people who live outside of cities or places with high taxes, in any case.

But there are all kinds of crazy things about the AMT. Why don't they just fix it permanently? Why do they have a patch every year? So you might be scratching your head, thinking, well, that's pretty nuts. Why don't we just take care of this once and for all and put an inflation indexing in there and it'll take care of itself every year?

Well, the problem with that is the AMT, theoretically, generates an awful lot of revenue. If you had 27 million more people paying the AMT - well, the deficit would look smaller, wouldn't it? So, every year, Congress gets to doing this patch and they look ahead at their budget projections and they'd like to keep the AMT in the projections because it projects more revenue into the future and makes things look better, even though everyone knows that's a fiction.

MARTIN: Again, another reason why people can't stand Washington.

GEEWAX: Right. I mean, it is something that does make you feel pretty cynical about it because everyone knows that, every year, they patch the alternative minimum tax and yet, every year, it continues to exist because, on paper, it generates revenue in the future and that's just goofy.

MARTIN: Let's just say one more thing very briefly. Let's say that the key players do come up with an agreement on the fiscal cliff and the AMT - and I know we're using jargon here - by the end of the year. Does that fix the problem?

GEEWAX: Well, they need to move very quickly. Right now, the IRS has to, you know, print up the materials that it takes to file taxes starting in January. People start doing their taxes in January and February. If Congress waits until the absolute last minute, December 31st, that really presents real challenges to the IRS. They need to get their forms in order. It's tough on accountants. It's tough on people. It can delay how quickly you can file your taxes. There are a lot of people who are very sick of this annual exercise in last-minute brinksmanship and, you know, the longer it goes into the new year, the more of a mess it is.

MARTIN: That was NPR senior business editor Marilyn Geewax joining us once again from our studios in Washington, D.C.

Marilyn, thank you.

GEEWAX: You're welcome.

(SOUNDBITE OF MUSIC)

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