Don't Mess With Taxes

The alternative minimum tax, or AMT, is a parallel tax system established in 1969 to ensure that wealthy taxpayers didn't use loopholes to escape paying their fair share of taxes.

Back then, wealth meant folks earning $200,000 or more.

That's pretty darn close to the $250,000 income level that's cited now by politicians as they discuss the income threshold for tax hikes.

But when it comes to the AMT, folks making less than that nowadays often find themselves paying this alternate tax. The reason? Because when the AMT was created 43 years ago, it wasn't indexed for inflation.

Instead of passing a law so that AMT amounts, like many other tax provisions, automatically change when inflation figures warrant, Congress makes changes every year or so to bump up the income exclusion amounts (and other things) for AMT purposes.

The last time Capitol Hill did that was at the end of 2010, when AMT patches as they're called were made for the 2010 and 2011 tax years.

That temporary change means that potential AMT victims are protected when they file their 2011 returns this year.

But right now, since there's no AMT adjustment for 2012, millions of not-really-rich taxpayers could face higher Internal Revenue Service bills if Congress doesn't again take action.

It's a safe bet that the House and Senate will agree to an AMT patch for 2012, again probably as part of the larger tax extenders measure. That action, however, likely won't be until later this year; right now conventional wisdom has it happening in a lame duck session following the Nov. 6 election.

If you think you might fall prey to this costly parallel tax, either on your 2011 return or your 2012 filing, check out today's Daily Tax Tip, which offers a closer look at the alternative minimum tax.

Why the AMT remains: I worked on Capitol Hill and then the private sector in Washington, D.C., for almost 20 years. In each of those years and the ones since I moved, Congress has talked about eliminating the alternative minimum tax.

So why hasn't that happened?

Money.

Even with the patch, the AMT brings Treasury a lot of cash. And despite all the talk, lawmakers haven't been able to agree on a way to replace that dough if they do away with the AMT.

In his fiscal year 2013 budget, Obama floated the idea of replacing the AMT with Buffett Rule legislation.

This proposal, named after wealthy financier Warren Buffett who sparked a tax fight on and off Capitol Hill when he complained that the tax system enables him to pay a lower tax rate than his secretary, would require individuals making more than $1 million to pay at least 30 percent of their income in taxes.

The Obama proposal was not part of the budget itself, so there are no figures on how much revenue this might cost or create.

Buffett Rule bill introduced: But there is a Buffett Rule pending in Congress.

The week after the president's State of the Union address in which he also mentioned the Buffett Rule, Sen. Sheldon Whitehouse (D-RI) introduced the Paying a Fair Share Act.

The legislation, says Whitehouse, would "put an end to a tax policy that often asks middle class workers to pay higher tax rates than individuals earning more than $1 million per year."

S. 2059 is cosponsored by Sens. Daniel Akaka (D-HI), Mark Begich (D-AK), Richard Blumenthal (D-CT), Tom Harkin (D-IA), Patrick Leahy (D-VT), Bernie Sanders (I-VT) and Chuck Schumer (D-NY). As the president suggested, the bill calls for a 30 percent effective tax rate on multi-million-dollar earners.

Of course, all this, at least right now, is just the latest performance of political theater. S. 2059 is pending in the Senate Finance Committee and will stay there for a while.

AMT vs. Fair Share Tax: But Tax Policy Center (TPC) folks have taken a look at the bill and this week released estimates on how replacing the alternative minimum tax with the Fair Share Tax would affect individual income tax revenue from 2012 to 2022.

Click image for a larger view.

The bottom line according to TPC numbers crunchers?

"We found that the Fair Share version of the Buffett rule wouldn’t come close to paying for AMT repeal," writes Dan Baneman at TPC's blog TaxVox. "Scrapping the AMT would lose a whopping $1.2 trillion relative to current law between now and 2022. The Fair Share Tax would only recover about $100 billion of that revenue, for a net loss of $1.1 trillion."

Baneman also points out a cold, hard AMT fiscal truth: The parallel tax generates so much more money than Whitehouse's proposal because the AMT affects many more taxpayers.

"By design, the Fair Share tax wouldn't affect anyone making less than $1 million," says Baneman. "Yet 96 percent of AMT taxpayers have incomes under $1 million, accounting for 77 percent of all AMT revenue. The Fair Share tax would need to start at a much lower income level to make up the lost revenue from the AMT."

That's not likely to happen, at least not in this political climate.

So brush up on the AMT intricacies. It's a tax that's going to be around for a while.

You also might find these items of interest:

• Tax subsidies of the rich and famous
• Millionaires' message to Super Committee: Tax us!
• The Advocate and the AMT