by Ken Rankin
Washington - While they rarely agree on tax reform strategies, Republicans, Democrats, the Internal Revenue Service and the American Institute of CPAs are on the same page about the need for relief from the Alternative Minimum Tax.
There’s considerably less agreement on precisely how to rein in the AMT - a "heads I win, tails you lose" provision of the tax code that was enacted 30 years ago in response to concerns that a handful of high-income taxpayers were making adroit use of tax preferences and deductions to avoid federal tax liability.
Only 19,000 U.S. taxpayers were affected by the Alternative Minimum Tax in 1970, but because of bracket creep, that number mushroomed to 1.5 million this year. Left uncorrected, the AMT will make the federal income tax considerably more complex and expensive for 17 million American families by 2010 according to the Joint Economic Committee.
Few of those likely to be hit with the AMT restrictions are even aware of this tax, and many tax practitioners have warned that a widespread taxpayer revolt is likely if millions of middle income Americans begin losing their cherished deductions and exemptions.
Congress has been nibbling at the edges of the problem with minor tax code changes allowing individuals to use personal credits to offset AMT tax liability during the 2000 and 2001 tax years - a provision that was extended through 2003 as part of the economic stimulus package signed by President George W. Bush earlier this year.
But the lack of any clear consensus on how far to go in whittling back the AMT has effectively stalled more substantive reform efforts in their tracks.
More than two dozen bills are pending on Capitol Hill to cut back on the spread of the AMT, including measures to exempt stock option gains, farm subsidies, state and local income tax refunds, foreign tax credits and other preference items from the Alternative Minimum Tax.
Other proposals, including Republican Sen. Tim Hutchinson’s Real AMT Relief Act, would phase out the individual alternative tax altogether by 2006.
The AICPA, which has repeatedly criticized the AMT as a major contributor to unnecessary tax code complexity, has recommended a somewhat less drastic cure involving the elimination of itemized deductions and personal exemptions as adjustments to regular taxable income in calculating taxable income for AMT purposes.
For her part, IRS National Taxpayer Advocate Nina E. Olson has also called for relief from the alternative minimum tax - a provision that she said penalizes "unintended targets ... because they have large families, live in high-tax cities or states, or earn their income in a variety of ways other than direct compensation, such as stock options."
In presenting her annual report to Congress earlier this spring, Olson released an analysis by her office which concluded that calculating the AMT is one of the 20 most serious problems encountered by American taxpayers today.
Although her report included several possible ways for excluding middle-income taxpayers from the alternative tax bite, she told Congress that the simplest solution might be to establish a new threshold for the AMT.
"I personally favor the alternative proposal of establishing a gross income threshold, below which a taxpayer will not be subject to the AMT," she testified. "This proposal has the advantage of providing relief to those taxpayers who must dedicate 12 hours to simply determining whether they are subject to the tax at all."
Instead, an individual would only need to "look to a line on his or her return and check it against the threshold for his or her filing status," Olson explained. "The taxpayer will learn from the face of his or her return whether he or she is subject to the AMT."
