A dreaded tax is slated to be fixed

Lawmakers have vowed to revise the alternative minimum tax, which is imposing higher taxes on 4 million middle-class households this year.

from the April 13, 2007 edition

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Four million hit by AMT this year

An estimated 4 million Americans will be subject to the higher AMT this year. The number would have been 11 million, but Congress approved a temporary patch last year. Unless lawmakers apply another patch or pass a comprehensive reform, that number will jump to as many as 23 million people for the 2007 tax year.

"They're suffering from a problem that nobody really intended to incur and which nobody has gotten around to fixing," says Alan Viard, a scholar at the American Enterprise Institute in Washington.

Think of the AMT is a kind of shadow tax system. It was enacted in 1969 as a way to ensure that the richest Americans, if they used legal loopholes to avoid taxes, would end up paying at least something.

Two calculations of the tax bite

This is how it works: Households with annual income above a certain threshold – set last year at $65,000 – must calculate their tax liability two ways. First, they calculate their tax liability using the regular tax code, which allows for deductions for mortgage interest, state and local taxes, and other items. Then, they must recalculate it under the AMT, which does not allow for most of those write-offs. The taxpayer shells out to the IRS whichever number is highest.

The problem is that the AMT threshold was never indexed to inflation. As a result, more middle-income Americans like Ms. Rauh are getting snagged by it. For many, that means their mortgage-interest deduction, which might have saved them thousands of dollars in taxes in the past, suddenly no longer counts.

"It surprises people. It comes out of left field, and a lot of people who never paid it don't know it's there," says Dennis Jacobe, Washington-based chief economist at the Gallup Organization. "Generally speaking," he adds, "people view the tax system as relatively fair, depending on where you sit in the income spectrum."

Representative Rangel's committee has held two hearings on the AMT already and expects to hold more this spring. His goal is to have a bill ready for a vote no later than June, according to his staff.

Some analysts expect that the best Congress can do this year is another patch, because the long-term solutions proposed by Democrats and Republicans remain far apart.

"At this moment I'm not sure there's a solution that would work for both of them," says Mr. Viard. "The Democrats are not willing to consider any base-broadening [that would do away exemptions], and the Republicans are not willing to consider any marginal tax increases. I don't really see any common ground there.

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