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Democrats Promote Relief from the Alternative Minimum Tax

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The Alternative Minimum Tax was created in the 1969 to insure that wealthy American's weren't using tax shelters to get out of paying income tax. But it wasn't indexed for inflation. And now many middle class people find themselves liable. Democrats in Congress say curbing its reach is a top priority.

JOHN YDSTIE, host:

On Fridays we focus on your money. Today, how much of it the government gets to take. Democrats in Congress say on of their top priorities will be curving the reach of a tax called the AMT. The Alternative Minimum Tax originated in 1969 and was designed to insure that very wealthy people paid at least some income tax.

But because the tax is not adjusted for inflation it's zapping more Americans. If a temporary fix is allowed to expire next year, 23 million taxpayers could be affected, many of them solidly in the middle class. David Larsen is a chemical engineer from Topsfield, Massachusetts. He's paid the alternative minimum tax for five years.

Mr. DAVID LARSEN (Chemical Engineer): I was shocked. I assumed that never applied to my situation. I would consider myself upper middle income -certainly not wealthy - and I don't use any tax shelters to avoid paying taxes.

YDSTIE: And how much more has your tax been under the AMT than under the regular income tax?

Mr. LARSEN: Okay. The first year was $1,700, and that's in 2001. And it's been progressively increasing, to approximately $3,000 now, each year.

YDSTIE: In fact, that's the average amount people pay under the AMT, above what they would owe under the regular tax system. The way it works is you pay whichever tax is higher. Larsen won't say exactly how much he makes, but he says it's in the range of $150,000 a year.

One of the reasons he was trapped by the AMT, is that when you calculate what you owe under this parallel tax, you can't take many of the deductions you normally get - including the deduction for state and local taxes, property taxes, and dependent children.

Kate Free(ph) is a financial advisor at the Family Firm in Bethesda, Maryland -says more than half of her clients pay the unpopular tax.

Ms. KATE FREE (Financial Officer, The Family Firm): Clients get very upset and they want to know how do we get rid of it, what is this, why do I have to pay it, and, you know, what can be done? And unfortunately there's really not a whole lot that can be done. Once you're in AMT, you have to, you know, if there's a calculation, you play by the rules and that's what it is.

YDSTIE: What level should people begin to expect that the AMT - the alternative minimum tax - is going to touch them?

Ms. FREE: I would say $150,000, right now, in our 2006, 2007 tax situation.

YDSTIE: That's household income, right?

Ms. FREE: That's household income.

YDSTIE: When you step back, though, and think about it - and you think about the big deficits that the country is facing right now - is it a simple statement to say this is not a fair tax, or this simply another way to tax people who are doing quite well in our society?

Ms. FREE: I think people feel like it's a bait and switch - this really sneaky back tax that comes around - and I think that's what surprises clients more than anything. If they knew from the get go, this was the way it was going to be, they could deal with it better I believe.

YDSTIE: The AMT is also quietly eroding the Bush administration's big tax cuts, says Len Berman of the Tax Policy Center, a Washington, D.C. think-tank. That's because as the regular tax rates decline, more people are snagged by the AMT's higher rates.

Mr. LEN BERMAN (Tax Policy Center): Actually, about a third of the tax cuts that people might have thought they were going to get from the lower rates, is taken back by the alternative minimum tax. So in some ways, the tax cuts were kind of a sham. I mean, very high-income people got the tax cuts that they were expecting because, ironically, relatively few of them are subject to the AMT and very low-income people are not going to be subject to the AMT. But increasingly, for the middle class, their tax system is going to be the AMT.

YDSTIE: Berman expects the Congress will extend the temporary fix to the AMT and keep the number of taxpayers affected to around 3.5 million. But these extensions would cost the Treasury half a trillion dollars over the next 10 years. If Congress does nothing, fully one-third of U.S. households making between $75,000 and 100,000 a year, will have to pay the alternative minimum tax next year.

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