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The Honolulu Advertiser
Posted on: Thursday, April 6, 2006

AMT offsets tax breaks for affluent

Gannett News Service

Bruce Steiner, a tax and estate attorney at Kleinberg, Kaplan, Wolff & Cohen in New York City, pays the alternative minimum tax. Next April, millions more Americans will have to pay the tax if Congress doesn’t act.

ROHANNA MERTENS | Gannett News Service

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WASHINGTON — What Congress has given in terms of lower tax rates, it also has taken away from millions of Americans this tax season.

If you are affluent, have dependent children and pay high property taxes, it's increasingly likely you will be paying the 26 percent to 28 percent alternative minimum tax as part of your federal income tax bill that must be in the mail by April 17.

The Congressional Research Service estimates 4 million taxpayers will pay the AMT this tax season. And next spring, when 2006 taxes are due, it will balloon to 19 million.

Congress is working on legislation that would stop the AMT from reaching into the pockets of millions more Americans as well as other tax breaks that are expiring in the next couple of years.

Sen. Charles Grassley, chairman of the Senate Finance Committee, predicted that House-Senate negotiators would work out an agreement on tax cut extenders well before Memorial Day.

House Republicans and the Bush administration say lower tax rates on capital gains and dividends that expire at the end of 2008 should be the priority.

But the Senate recently approved a statement urging its negotiators to make AMT the No. 1 priority because the income threshold for paying it dropped back to a lower level on Jan. 1 of this year.

"One's now and the other's later," said Sen. Max Baucus, D-Mont., explaining why AMT should be a priority.

What's irksome to some people who pay the AMT is that it wipes out juicy tax deductions and offsets the lower rates that have been advertised by the Bush administration and Congress.

"You feel that they've given you something and then taken it back," said Bruce Steiner, a tax and estate attorney who pays the AMT and calculates it for clients. "That's worse than not having given it in the first place."

Instead of paying a 15 percent tax rate on capital gains and dividends that's been ballyhooed by the administration, Steiner estimates the AMT pushes the effective tax rate to 22 percent for households earning between $150,000 and $382,000.

Steiner, 55, fits the profile of an AMT filer because he's a well-paid professional who claims what the IRS considers to be excessive deductions.

What gets him there? He's a New Jersey resident who pays state income taxes plus $13,000 a year in property taxes on his house in Springfield, and personal deductions for his wife and two dependent children.

New Jersey is the nation's No. 1 state for AMT payers, including retiree Robert Kelly of Oceanport.

Kelly, a 74-year-old former mid-level executive, estimates he had to pay an extra $5,000 in income taxes this year under AMT.

The major reason: He sold a large amount of stock that he accumulated over 32 years working at Johnson & Johnson to build a house.

Instead of paying a low tax rate on the capital gains from his stock sale, Kelly was hit with the AMT.

"All of a sudden, bingo," Kelly said. "Surprise."

AMT has become the bane of affluent families who don't consider themselves rich when compared with the very wealthy.

Among households with incomes between $200,000 and $500,000, about 54 percent pay the AMT, according to Leonard Burman, co-director of the Tax Policy Center. But among America's wealthiest households with incomes more than $1 million, only 25 percent pay the AMT.

Some liberals who opposed the Bush tax cuts have little or no sympathy for AMT payers.

"My advice is to live a long and happy life and stop complaining," said Bob McIntyre, director of Citizens for Tax Justice, a nonprofit group that advocates a progressive tax state. "Lower rates on capital gains and dividends are for the really rich, and AMT relief is for the near rich."

• • •

AMT repeal costly

A complete repeal of the alternative minimum tax would reduce federal revenue by $1 trillion from 2006 to 2015, according to the Congressional Research Service.

A presidential commission on tax reform suggested last year that the AMT could be eliminated if caps were placed on the mortgage interest deduction for homeowners and on employer-provided health insurance premiums.

But the Bush administration has not endorsed those controversial recommendations.

Learn more:

www.ctj.org/pdf/amtst0306.pdf, Who Pays the Individual AMT: State-by-state estimates for 2006, Citizens for Tax Justice

www.opencrs.com/document/RS21817, The Alternative Minimum Tax (AMT): Income Entry Points and ”Take Back’ Effects,“ Congressional Research Service

www.opencrs.com/document/RS22083, Alternative Minimum Taxpayers by State, Congressional Research Service

http://opencrs.cdt.org/rpts/RS22200_20050719.pdf, Potential Distributional Effects of the Alternative Minimum Tax, Congressional Research Service

www.ctj.org/pdf/cg1105.pdf, Impact of Extending Capital Gains and Dividends Tax Cuts by State, Citizens for Tax Justice