In recent hearings before the House Ways and Means Subcommittee on Select Revenue Measures, both the American Institute of CPAs and the New York State Society of CPAs called for the repeal of the oft-debated alternative minimum tax.

And on the same day, ranking Senate Finance Committee member Chuck Grassley, R-Iowa, filed an amendment to repeal the tax.

Joseph W. Walloch, incoming chair of the AICPA individual income tax technical resource panel, said that, "Due to the increasing AMT complexity, inversing AMT impact on unintended taxpayers, and AMT compliance problems, the AICPA supports repealing the individual AMT altogether."

David A. Lifson, president-elect of the NYSSCPA, observed that while the AMT may ensnare a few high-income taxpayers, it is generally not for the loophole reasons originally intended. And in doing this, he noted, it creates an unwelcome combination of tax and mind-boggling complexity and confusion inflicted on the people who pay most of the income tax - Americans with incomes in the top 1 percent.

"They paid nearly 40 percent of all these taxes in 2004," he said. "Over half of all taxpayers in the same year earned less than $45,000 and paid about 3 percent of the tax collected. This year, we estimate that most American families will earn less than $50,000 and will pay virtually no income tax at all, so it is critical to address a problem that now could affect the other half of the taxpaying families in this country."

Walloch said that the AICPA recognizes that, "Simply eliminating the AMT would generate a new set of problems, given the large loss of tax revenue that would accompany such a move." Consequently, he urged Congress to consider the AICPA's alternative solutions, which it believes would reduce or eliminate most of the complexity and unfair impact of the AMT. (See the AICPA's suggestions below.)

In addition to the AICPA and the NYSSCPA, the subcommittee heard testimony from a number of AMT victims, according to Lifson. "One of them was a Maryland firefighter who is subject to the AMT," he said. "In fact, it's pretty clear that a schoolteacher married to a cop in New York City is likely to be in the AMT this year if they don't change the law."

The problem, he said, is that virtually all of the taxes raised by the AMT are raised through eliminating those traditional congressional exclusions from taxable income. "In our testimony, we explained that a major portion of the tax avoidance tactics that were the target of the AMT were eliminated 20 years ago with the Tax Reform Act of 1986."

The reasons so many taxpayers are now affected by the AMT are state income taxes, local property taxes and other non-federal taxes, he said. "The AMT is, in substance, predominately a secret tax on the portion of our income paid over as taxes to state and local governments to provide community services such as schools, public safety and low-income household support," said Lifson. "To a lesser extent, it also quietly takes back tax savings from family tax relief mechanisms and benefits built into the regular tax system, and deductions that might be otherwise allowed relating to the production of gross income."

Lifson presented his own examples of AMT victims, among them Sharon, a single mother with one child earning $50,000 a year. "In 2004, she received a one-time $500,000 taxable settlement from a lawsuit. To receive that settlement, she had to pay legal fees of $190,000, bringing her net income from the settlement to $310,000. Regular federal taxes on the settlement were approximately $105,500, and state and local income taxes were $52,000, leaving her with $152,500. Then, because the AMT does not give a deduction for either legal fees or state and local taxes, she paid an additional $39,500 of AMT tax, reducing her settlement amount to $113,000."

"Looked at in another way, the lawyers and the IRS each got more out of the settlement than Sharon did," he said.

"My clients regularly pay AMT, although we do our best to avoid it," said Lifson. "When they must pay it, I tell them which of their expectations have been shattered, such as their expectation that their income to pay for local government services should not also be taxed by the federal government."


Some tax planning for the AMT is possible, according to Lifson. "Much of the AMT is caused by bunching. The failure to pay state and local taxes by December in the year the income is earned, even though it is perfectly legal to wait until April, can cause a problem. Any taxpayer with a highly variable income who is a cash-basis taxpayer can easily wind up with too much in state and local tax deductions in a low-income year, and not enough in a high-income year. The same is true of investor expenses."

Meanwhile, the just-released Democrat budget proposal employs a reserve fund that allows AMT relief only if offset by equivalent tax increases or spending cuts, according to the House Republican Caucus Committee on the Budget. In his proposal to repeal the AMT, Grassley rejected this analysis.

"The reform or repeal of the AMT should not be offset, because it is money we were never supposed to collect in the first place," he said. "If we start trying to spend revenues we expect to collect in the future because of the AMT, we will be living beyond our means. We need to stop assuming that record levels of revenue are available to be spent, and recognize that the AMT is a phony revenue source."

Grassley is submitting his amendment to repeal the AMT now, he said, because he wants to "get members of Congress who say they support repeal to show their support for the record," and "eliminate the mythical budgeting that results from assuming current-level AMT revenues."


The AICPA's recommendations for fixing the AMT include:

* Increasing and indexing for inflation the AMT brackets and exemption amounts, and eliminating phase-outs.

* Eliminating the standard deduction and personal and dependency exemptions as adjustments to regular taxable income in calculating the AMT.

* Eliminating miscellaneous itemized deductions as an adjustment to regular income tax, so that middle-income taxpayers are able to deduct such items as employee business expenses for the AMT.

* Eliminating state and local income, and other taxes as an adjustment.

* Allowing tax credits enacted to promote important public goals - such as the low-income tax credit, tuition tax credits, etc. - to be credited against AMT liabilities.

* Exempting all taxpayers with regular tax adjusted gross incomes under $100,000 from the AMT.

* Having only one AMT tax rate and setting that rate to below the third-lowest regular tax rate of 25 percent.

* Requiring the impact of the AMT on future tax legislation - i.e., whether the intended tax benefits of any change are negated by the AMT regime - to be reported with the revenue impact of proposed legislation.

* Allowing a minimum tax credit for all AMT, not just AMT attributable to deferral preferences, in order to place the individual AMT on parity with the corporate AMT.

A Liberalizing the capital loss limitation rules when calculating the AMT associated with incentive stock option transactions (e.g., specifically allowing a negative basis adjustment for ISO differences to be ordinary, rather than capital, loss).

* Eliminating the definition of "qualified housing interest" and allowing all deductible residence interest as a deduction for the AMT.

* Excluding the AMT from the estimated tax penalty.

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