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Monday, January 14, 2013

NY Times: An Incomplete AMT Fix

New York Times editorial:  An Incomplete Fix:

Thanks to the fiscal cliff deal, the alternative minimum tax will not ensnare tens of millions of middle-class Americans for whom it was never intended. The deal raised the income thresholds before the AMT kicks in and indexes them for inflation going forward. As a practical matter, this means that 28 million filers who would have had to pay the tax on their 2012 returns have been spared and are much less likely to have to pay the tax in the future.

Yet the fixes are incomplete. The purpose of the AMT is to ensure that wealthy taxpayers cannot make excessive use of deductions, shelters and other tax breaks. It was supposed to hit multimillionaires and billionaires whose tax shelters reduce their tax bills to a pittance relative to their incomes. In the absence of comprehensive reform, the AMT will continue, for the most part, to allow the highest-end taxpayers to escape, while still afflicting many taxpayers below those lofty levels.

In 2011, for instance, more than half of taxpayers in the $200,000 to $500,000 income range paid the AMT compared with only one-third of taxpayers who made more than $1 million, according to the Tax Policy Center. The situation will be much the same for 2012 and beyond unless Congress acts to rectify it.

The main problem lies in what counts as an excessive tax break. Common write-offs for dependents and for state and local taxes are counted as shelters subject to taxation under the AMT. Most AMT payers are couples with children in the high-tax states of New York, New Jersey, Connecticut and California.

Tax breaks for dividends and capital gains, however, are not counted as shelters subject to the AMT As a result, the wealthiest Americans — who reap the lion’s share of such investment income while enjoying the low tax rates that go with them — are less likely than not-so-wealthy filers to fall into the AMT.

(Hat Tip: Mike Talbert.)

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Comments

One of the more straightforward fixes is to simply index the starting points for the phaseout of the AMT exemption amounts for inflation. Taxpayers facing AMT lose 25 cents for every dollar when pre-AMTI exceeds $112,500 or $150,000. These thresholds have been in place since 1987. Could you imagine at what level they would be now, had they been indexed for inflation? Why does this fact receive so little attention by not only Congress, but editorial write-ups? So, while having higher exemption amounts is welcome, what's the use if a good portion of them is lost to the phaseout mechanism?

Posted by: TaxesProf | Jan 15, 2013 11:21:30 AM

I subscribed to the NY Times for over ten years, but dropped it several years ago and haven't missed it at all. Whenever I see one of their editorials these days, I wonder what on earth I was thinking to subscribe for so long.

Why do they cling to the originally stated justification for an AMT, as if it overrules 40+ years of further policy development? Whatever the motivation was for a tax in the early 1970's, it has long since morphed into something else entirely.

This basic error leads to all sorts of muddled thinking. They say that the tax hits more taxpayers in the 200,000-500,000 AGI range than taxpayers in the 1,000,000+ range, as if this is an obviously bad thing. (It will continue unless Congress acts to "rectify" it (!).) Is the impact so different from what it was after 1986? Or after the last increase in AMT rates, in 1993? Not really. It works as Congress intended, essentially just another way of raising a bit more revenue, so there is nothing to "rectify".

Posted by: No-no-no | Jan 16, 2013 8:43:28 AM