Monday, January 14, 2013
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.)