Growing numbers face alternative minimum tax

By Mary Dalrymple
Associated Press

WASHINGTON — An obscure tax intended to prevent the wealthy from dodging their income taxes will affect a third of taxpayers by the end of the decade, private researchers report.

By 2010, many taxpayers who consider themselves middle-class families will pay the tax. It will hit 97 percent of married couples with two or more children who earn $75,000 to $100,000.

Researcher Leonard Burman, co-director of the nonpartisan Tax Policy Center, said repeal is the best way to prevent the tax from plaguing the middle class.

"But it would cost a lot," he said — a nearly $1.5 trillion drain on the federal government through 2013 if repealed this year, he estimated. The Tax Policy Center is a joint venture of the Urban Institute and the Brookings Institution.

The alternative minimum tax was started in 1970 after lawmakers discovered that a handful of high-income households used tax shelters to avoid paying any income taxes. It now imposes a complex accounting requirement on many taxpayers, forcing some to compute their taxes twice, under the standard procedures and the alternative minimum tax.

The Internal Revenue Service's taxpayer advocate identified it as one of the most complex parts of the tax code, and has urged repeal.

"The good news is that as the reach of the alternative minimum tax expands to encompass ever more taxpayers, the political benefits of seeking out a solution will expand as well," Burman said.

Although lawmakers have blunted its effect for a few years, the tax will affect growing numbers of middle-class taxpayers because it is not indexed for inflation and many deductions cannot be used, according to the Tax Policy Center.

Families with children and those in high-tax states will be hurt because the alternative minimum tax does not allow exemptions for children or deductions for state taxes.

The tax will amount to a substantial surcharge, an average of $3,750, by 2010.

The researchers also concluded the tax no longer serves its original purpose and does little to block individuals from using tax shelters.

In the late 1960s, when lawmakers identified tax shelters, many high-income individuals converted their earned income into capital gains, taxed at a lower rates.

Over time, lawmakers changed the alternative minimum tax computations to exclude capital gains. Congress acted in May to reduce the top capital-gains rate to 15 percent, and Burman said the reduction could create more tax shelters.

"I wouldn't be at all surprised if tax sheltering increased in the years to come, and the (alternative minimum tax) wouldn't do anything about it," he said.