As she has each year for the past decade, IRS National Taxpayer Advocate Nina Olson calls once again in her annual report to Congress for repeal of the Alternative Minimum Tax. Using labels such as “difficult,” “complicated,” “burdensome,” and a “penalty” to describe the AMT, she also notes that it hits particularly hard those “taxpayers who have not done any tax planning.” Realistically, Congress is not about to repeal this money-making machine, so the only solution is for individuals to undertake some basic tax planning to minimize the effect of this tax. Some important criticisms of the AMT that are made by Ms. Olson in her report are set forth below.
The Alternative Minimum Tax has failed to achieve its original goal
The report cites statistics showing that more than 35,000 taxpayers with incomes above $200,000 pay no income tax at all – neither the Regular Tax nor the AMT. How can this be? The primary reason is that tax exempt municipal bonds, with the exception of so-called “private activity bonds,” are totally exempt from taxation, both for the AMT as well as the Regular tax. This is one of the “loopholes” that Congress has not closed.
The AMT hits middle-income families who live in high-tax states particularly hard
The tax law allows a deduction for personal exemptions in computing the Regular Tax, generally recognizing the fact that the larger a family is the more income it needs to spend on meeting basic needs. For 2013 this exemption is $3,900 per individual, so a family of four will not have to pay tax on the first $15,600 of income. Unfortunately, personal exemptions are disallowed in computing the Alternative Minimum Tax, which means that the larger the family the more likely the taxpayer will be stuck paying the AMT.
Also, the Regular Tax deduction for state and local taxes is not allowed for purposes of the Alternative Minimum Tax. Unfortunately, states with the highest state and local tax burden, and, thus, the highest AMT risk, are the most populous states – California and the New England states, including New York and New Jersey for example. Too many families are getting stuck with the AMT just because they have children and happen to live in a high tax state.
The AMT is complicated and burdensome
Compliance costs for dealing with the Alternative Minimum Tax are almost unbelievable. In a recent study the IRS estimated that taxpayers in the aggregate spent over 18 million hours completing and filing the AMT form, whether they needed to or not. This amounts to over 12 hours for each person who actually paid the tax. By comparison, the IRS estimates that it takes 22 hours to fill out the entire Form 1040. Way too much time is being spent on the AMT, much of it unnecessary.
Other calls for repeal
The Taxpayer Advocate isn’t the only one calling for repeal of the AMT. As noted in her report, in 1999 Congress voted to repeal the AMT but the legislation was vetoed by the President. Both the 2005 Tax Reform Panel and the 2010 National Commission on Fiscal Responsibility and Reform recommended repealing the AMT. Over the years both Democratic and Republican leaders in the House and the Senate have also proposed repealing it, but none of this ends up going anywhere.
The AMT is difficult to repeal, and most likely never will be repealed, because of the significant amount of revenue that it raises. Accepting this fact, the only thing individual taxpayers can do is to look out for themselves, and, as suggested by Ms. Olson, get involved in doing some basic tax planning.