Tax bill only delayed AMT's widening net

By Sandra Block
USA Today

The $146 billion tax cut package signed into law earlier this month doesn't solve fundamental problems with the alternative minimum tax, but it will keep the monster in the closet through 2005.

The AMT was designed to prevent wealthy individuals from using elaborate loopholes to avoid taxes. But because it wasn't indexed to inflation, the number of taxpayers who fall into the AMT trap has steadily increased. People who pay high state taxes or receive incentive stock options from their employers are particularly vulnerable.

When calculating whether you owe AMT, you're allowed to exempt some of your income. In 2003 and 2004, the exemption was $40,250 for single taxpayers and $58,000 for married couples who file jointly.

If Congress hadn't acted, the exemptions would have dropped to $33,750 for singles and $45,000 for couples in 2005.

Those lower exemptions would have sharply increased the number of middle-income taxpayers subject to the AMT, says Tom Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants. Congress temporarily averted that train wreck by extending current exemptions through 2005.

That doesn't mean you should stop worrying about the AMT. Because the exemptions aren't indexed to inflation, the number of taxpayers owing the tax will continue to increase, says Mark Luscombe, analyst for tax research firm CCH.

"All this forestalled was a drastic climb in the number subject to AMT," he says.

Other provisions in the tax package include:

• Tax deduction for hybrid vehicles. The tax package reinstates the $2,000 deduction for hybrid vehicles, which combine an electric motor with a gasoline engine to provide above-average gas mileage. With gas prices above $2 per gallon in many places, sales of these cars have soared, even though they cost about $3,000 more than comparable gas-powered cars.

The tax deduction was scheduled to drop to $1,500 this year and to $1,000 in 2005, says William Massey, a senior tax analyst at RIA, a provider of tax information and software. It's limited to new cars. You can't claim it if you buy a used hybrid.

• Classroom expense deduction for teachers. Teachers who use their own money to buy classroom supplies will be permitted to deduct up to $250 from their taxes. The deduction expired at the end of 2003, but the tax package extended it to tax years 2004 and 2005.

The National Education Association estimates the average teacher spends $450 each year out-of-pocket on supplies.

• Simplified definition of a dependent child. Ask a mother to define a child, and she'll probably tell you it's a little person who eats three times his weight every day and forgets to pick up his toys.

The tax code is less definitive. It contains different eligibility standards for different tax breaks related to children, making it difficult for families to determine whether they qualify for various child-related tax benefits.