AMT — the tax we  love to hate

Conservatives hate it, liberals revile it, taxpayers agonize over it, but the alternative minimum tax is a handy thing to have around.

For Congress, the AMT offers a stream of theoretical revenue that makes tax-cut proposals seem relatively cheap under Washington’s budgetary “scoring” rules. Much of the expected revenue — which totals an estimated $670 billion over the next decade — likely will never materialize because Congress presumably will act to prevent millions of middle-class families with children from suffering the AMT’s stealth tax increase.

For the Bush administration, the AMT serves as a convenient whipping boy, illustrating the unfairness and complexity of a tax system the White House believes needs reform badly. President Bush has not said who would pay for fixing the AMT but has appointed a panel chaired by former Republican Sen. Connie Mack to come up with recommendations by the end of July.

The alternative minimum tax already affects nearly 3 million taxpayers, up from fewer than 200,000 in 1990. Originally designed to catch just 155 super-wealthy Americans who paid no taxes at all, the AMT now reaches well into the upper end of the America’s middle class, with most of those affected reporting income of $100,000 to $500,000.

But that is nothing compared to what would happen if Congress fails to act in the current session.

Unless something is done, some 20 percent of taxpayers will be caught in the AMT net next year, up from 4 percent currently. By 2010, “virtually all” middle-class families with two or more kids will be subject to the tax, according to Len Burman, co-director of the Urban-Brookings Tax Policy Center in Washington.

“The alternative minimum tax is reaching more and more each year, to the point where it is grabbing a lot of taxpayers at all income levels,” said Ross Rizzo, a certified public accountant and director of taxes and for Salibello & Broder in New York.

Nina Olson, the Internal Revenue Service’s national taxpayer advocate, identified the AMT as the nation’s No. 1 tax problem in 2003, saying it appears to function “randomly, no longer with any logical basis in sound tax administration or any connection with its original purpose of taxing the very wealthy who escape taxation.”

The tax is insidious and not only because it can cost middle- and upper-middle class workers hundreds or thousands of dollars in additional taxes. A stealth tax that operates as a parallel system, virtually unfathomable to laymen, the AMT makes a mockery of tax-planning strategies typically used by middle-class wage-earners.

“It raises a very serious complexity issue,” said Robert Carroll, deputy assistant Treasury secretary for tax analysis. "Individuals who are hit by the AMT are often unaware of it until they are hit by it the first time.”

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