Most everyone is agreed. The Alternative Minimum Tax (AMT) is like a zombie or a vampire that refuses to die. It is unfair, almost indecipherably complicated, increasingly targets the middle class rather than just the ultra-wealthy, and to make things even worse, the rules change every year making it impossible to plan for. So, if everyone hates it, including Obama’s Deficit Commission who says the AMT should be abolished, why don’t they just put a stake through its heart?
he AMT was originally targeted at just 155 high-income earners when its predecessor passed in 1969. Since then, it has steadily been applied to more and more taxpayers, and generated $22 billion in revenue for the government in 2008. And that, as you no doubt have figured out, is the reason that AMT lives. The government doesn’t want to give up the money. If it did, then new sources of revenue would have to be found, and that sounds suspiciously like it would entail new taxes or fees, something that would be seriously unpopular now.
So instead, the undead AMT lurches on. Originally dubbed the “millionaire’s tax”, it was aimed at preventing the wealthy from paying little or no tax. Above certain income brackets an AMT is calculated in addition to regular taxes with the taxpayer paying the highest amount. Many of the normal deductions are not allowable under AMT.
Sounds great, doesn’t it? Soak the rich. They can afford it, especially after that juicy tax cut they’re about to get, right? Maybe not, because their newly-lowered tax liabilities may mean AMT kicks into effect, cancelling out their tax savings. This is called the “take-back” effect, something that governments are skilled at.
But the truly noxious part about AMT is that it is not indexed to inflation, which means more and more people must pay it.