Alternative Minimum Tax Sneaking Up on Millions of Americans, Accountants Say
Apr. 16, 2003 (The Boston Globe) — Hundreds of thousands of Americans expecting a tax cut this year will instead have to pay an alternative tax that was designed to target the wealthy, but has increasingly hit the middle class, according to tax specialists and accountants.
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An estimated 2.5 million taxpayers will be subject this year to the Alternative Minimum Tax, created in 1969 to prevent the very wealthy from using creative deductions and shelters to avoid having to pay anything to the Internal Revenue Service. The number expected to pay the alternative tax represents an increase of about 30 percent, or 700,000 filers, over last year, and is projected to grow exponentially to 36 million taxpayers over the next decade.
Most vexing to affected taxpayers and their accountants is that the alternative tax is starting to hit a larger number of middle-class taxpayers, especially those who have several children and who live in states like Massachusetts, where the burden of real estate and state income taxes is higher than average.
Though both Congress and the administration agree that the schedule for paying the alternative tax should be addressed, neither is expected to initiate corrective legislation in the near future because it would cost the government hundreds of billions of dollars in lost revenues.
Larry Schwartz, a Massachusetts accountant, said he recently had to inform a local couple with six children and an income of $85,000 a year that they will have to pay the Alternative Minimum Tax for the first time, despite the income tax cuts enacted in 2001.
"We've got a nice couple from the South Shore, with six kids, always made a lot of money. He lost his job; she still has hers. They have a big mortgage, pay a lot in real estate taxes, give a lot of money to the church, and they paid a lot in Massachusetts taxes," said Schwartz, director of the tax department for Carlin, Charron & Rosen LLP in Worcester. "This year, they're in the AMT for the first time. They want to know, 'How can I owe more tax when I don't have any more income?' "
The answer lies in the tax code, which has not changed to fully reflect the impact of inflation on the alternative tax. Taxpayers who might have been considered rich in 1969 are upper-middle class in 2003 dollars, said New York-based tax attorney Stuart Rosow of the firm Prokauer Rose LLP. Further, the rules have changed over the years to affect people who have a large amount of deductions for child dependents, charitable contributions, and payments for mortgage interests and state and local taxes.
All filers are required to calculate their income tax using permitted deductions, then compare that amount to the alternative tax schedule, which mandates a minimum to be paid regardless of deductions. The higher amount must be paid.
The South Shore couple -- whom Schwartz would not name and who once had a combined income of $200,000 a year -- would normally take deductions for their six children, contributions to the family church, Massachusetts state taxes, and real estate taxes, which would dramatically lower their taxable income. But in such cases, the alternative tax is often higher, Schwartz said, and the couple will face a higher tax bill even as they are coping with the loss of one income.
"This thing is a silent killer. It's a monster headed for the middle class nobody can see," said Chris Bergin, CEO of the nonprofit, Washington-based group Tax Analysts.
Some of Schwartz's middle-class clients are already feeling the crunch. A single mother with three children earning $45,000 sold some stock last year to pay for one of her children's braces. But because her deductions went beyond a certain limit, she was hit with the alternative tax. "Now I have to tell her she owes $4,000," Schwartz said.
Ken Vacovec, a partner in the Newton law firm Vacovec, Mayotte & Singer, said nearly half of his firm's clients now must pay the alternative tax, and "people aren't happy. The worst problem is the people who don't expect it. It winds up sneaking up on them."
In Washington, the Alternative Minimum Tax is viewed as a kind of fiscal dental appointment: Virtually all lawmakers know it is a problem and needs to be fixed, and that the solution will only get more painful. But both the White House and Congress have been reluctant to set aside money they would rather use for a tax cut or domestic spending.
"It certainly is a problem I think most parties agree needs to be taken care of," Office of Management and Budget Director Mitchell E. Daniels Jr. told a House panel last year, echoing comments by Democrats and Republicans on Capitol Hill. Administration officials and congressional leaders have discussed making dramatic changes to the alternative tax in 2005 or later. But President Bush's budget includes only a minor adjustment in the alternative tax schedule, and it appears that fundamental changes will not occur soon, said Representative Richard Neal, Democrat of Springfield.
"It costs too much," said Neal, who has urged revisions in the alternative tax for years. "I think they actually agree with me. They just don't do anything about it."
Ironically, President Bush's 2001 tax cut will make more people susceptible to the alternative, meaning they will not get the full benefit of the $1.3 trillion tax relief package, said William Gale, an economist with the Brookings Institution. By reducing the overall tax rates, without reducing the alternative tax, more middle-class people will be running up against the minimum.
Without the tax cut, 18 million Americans would have been subject to the alternative by 2013, Gale said. But with the tax cut, the number almost doubles, to 36 million -- approximately one-fourth of all tax filers and one-third of Americans who end up owing the IRS, he said.
Treasury Department analysts have come to similar conclusions.
If the alternative tax schedule is not fixed, virtually all upper-middle class families with two or more children will be subject to it by 2010, said Keith Ashdown of Taxpayers for Common Sense. Changing the schedule to target those who were originally meant to pay it would cost a total of $600 billion to $700 billion over the next 10 years, said Joel Friedman of the Center on Budget and Policy Priorities.
"I don't think it's unusual for any administration to have a legislative grenade or a ticking time bomb on their hands and to try to pass it on to whoever succeeds them," Ashdown said.
-- Susan Milligan
© (c) 2003, The Boston Globe. Distributed by Knight Ridder/Tribune Business News. Reprinted with permission
Apr. 16, 2003 (The Boston Globe) — Hundreds of thousands of Americans expecting a tax cut this year will instead have to pay an alternative tax that was designed to target the wealthy, but has increasingly hit the middle class, according to tax specialists and accountants.
--------------------------------------------------------------------------------
An estimated 2.5 million taxpayers will be subject this year to the Alternative Minimum Tax, created in 1969 to prevent the very wealthy from using creative deductions and shelters to avoid having to pay anything to the Internal Revenue Service. The number expected to pay the alternative tax represents an increase of about 30 percent, or 700,000 filers, over last year, and is projected to grow exponentially to 36 million taxpayers over the next decade.
Most vexing to affected taxpayers and their accountants is that the alternative tax is starting to hit a larger number of middle-class taxpayers, especially those who have several children and who live in states like Massachusetts, where the burden of real estate and state income taxes is higher than average.
Though both Congress and the administration agree that the schedule for paying the alternative tax should be addressed, neither is expected to initiate corrective legislation in the near future because it would cost the government hundreds of billions of dollars in lost revenues.
Larry Schwartz, a Massachusetts accountant, said he recently had to inform a local couple with six children and an income of $85,000 a year that they will have to pay the Alternative Minimum Tax for the first time, despite the income tax cuts enacted in 2001.
"We've got a nice couple from the South Shore, with six kids, always made a lot of money. He lost his job; she still has hers. They have a big mortgage, pay a lot in real estate taxes, give a lot of money to the church, and they paid a lot in Massachusetts taxes," said Schwartz, director of the tax department for Carlin, Charron & Rosen LLP in Worcester. "This year, they're in the AMT for the first time. They want to know, 'How can I owe more tax when I don't have any more income?' "
The answer lies in the tax code, which has not changed to fully reflect the impact of inflation on the alternative tax. Taxpayers who might have been considered rich in 1969 are upper-middle class in 2003 dollars, said New York-based tax attorney Stuart Rosow of the firm Prokauer Rose LLP. Further, the rules have changed over the years to affect people who have a large amount of deductions for child dependents, charitable contributions, and payments for mortgage interests and state and local taxes.
All filers are required to calculate their income tax using permitted deductions, then compare that amount to the alternative tax schedule, which mandates a minimum to be paid regardless of deductions. The higher amount must be paid.
The South Shore couple -- whom Schwartz would not name and who once had a combined income of $200,000 a year -- would normally take deductions for their six children, contributions to the family church, Massachusetts state taxes, and real estate taxes, which would dramatically lower their taxable income. But in such cases, the alternative tax is often higher, Schwartz said, and the couple will face a higher tax bill even as they are coping with the loss of one income.
"This thing is a silent killer. It's a monster headed for the middle class nobody can see," said Chris Bergin, CEO of the nonprofit, Washington-based group Tax Analysts.
Some of Schwartz's middle-class clients are already feeling the crunch. A single mother with three children earning $45,000 sold some stock last year to pay for one of her children's braces. But because her deductions went beyond a certain limit, she was hit with the alternative tax. "Now I have to tell her she owes $4,000," Schwartz said.
Ken Vacovec, a partner in the Newton law firm Vacovec, Mayotte & Singer, said nearly half of his firm's clients now must pay the alternative tax, and "people aren't happy. The worst problem is the people who don't expect it. It winds up sneaking up on them."
In Washington, the Alternative Minimum Tax is viewed as a kind of fiscal dental appointment: Virtually all lawmakers know it is a problem and needs to be fixed, and that the solution will only get more painful. But both the White House and Congress have been reluctant to set aside money they would rather use for a tax cut or domestic spending.
"It certainly is a problem I think most parties agree needs to be taken care of," Office of Management and Budget Director Mitchell E. Daniels Jr. told a House panel last year, echoing comments by Democrats and Republicans on Capitol Hill. Administration officials and congressional leaders have discussed making dramatic changes to the alternative tax in 2005 or later. But President Bush's budget includes only a minor adjustment in the alternative tax schedule, and it appears that fundamental changes will not occur soon, said Representative Richard Neal, Democrat of Springfield.
"It costs too much," said Neal, who has urged revisions in the alternative tax for years. "I think they actually agree with me. They just don't do anything about it."
Ironically, President Bush's 2001 tax cut will make more people susceptible to the alternative, meaning they will not get the full benefit of the $1.3 trillion tax relief package, said William Gale, an economist with the Brookings Institution. By reducing the overall tax rates, without reducing the alternative tax, more middle-class people will be running up against the minimum.
Without the tax cut, 18 million Americans would have been subject to the alternative by 2013, Gale said. But with the tax cut, the number almost doubles, to 36 million -- approximately one-fourth of all tax filers and one-third of Americans who end up owing the IRS, he said.
Treasury Department analysts have come to similar conclusions.
If the alternative tax schedule is not fixed, virtually all upper-middle class families with two or more children will be subject to it by 2010, said Keith Ashdown of Taxpayers for Common Sense. Changing the schedule to target those who were originally meant to pay it would cost a total of $600 billion to $700 billion over the next 10 years, said Joel Friedman of the Center on Budget and Policy Priorities.
"I don't think it's unusual for any administration to have a legislative grenade or a ticking time bomb on their hands and to try to pass it on to whoever succeeds them," Ashdown said.
-- Susan Milligan
© (c) 2003, The Boston Globe. Distributed by Knight Ridder/Tribune Business News. Reprinted with permission