More Mid-Income Folk May Be Subject to Tax Intended for Rich
David and Margaret Klaassen are ordinary middle-class people with an extraordinary tax problem. Since 1994, they’ve been forced to pay the alternative minimum tax--a sort of penalty tax designed to clip rich folks who use shelters and other loopholes to dodge Uncle Sam.
But the Klaassens, who are in their 40s, do none of that. Their biggest tax sin is having a lot of children--13, in fact.
Now, as Congress mulls over last-minute legislation, the Klaassens warn that you, too, may be vulnerable. If a pending “tax extender” package doesn’t pass this year, a lot more families--with a lot fewer children--could find themselves in the same costly boat when they file their 1999 tax returns.
Indeed, the number of individuals subject to the alternative minimum tax, or AMT, could more than double this year, largely because a group of tax cuts designed for the middle class--including the ballyhooed “child tax credit” and Hope and “lifetime learning” credits--could bump more than 1 million additional taxpayers into AMT range, says Mark Luscombe, principal tax analyst with CCH Inc., a Riverwoods, Ill.-based tax research and publishing firm. The family credits have been shielded from the AMT, but that exclusion is gone for the 1999 tax year if the extender legislation is not approved.
The AMT is triggered when a taxpayer would otherwise pay what the government considers too little tax. This can happen for a variety of reasons, including having a lot of itemized deductions or, in Klaassen’s case, having a lot of “personal exemption credits”--one for each dependent.
Already, the ranks of the AMT-paying public are burgeoning. In 1997, the most recent year for which official statistics are available, about 590,000 taxpayers paid $3.5 billion in AMTs--an average of $5,900 each. That compares with 478,000 taxpayers paying $2.8 billion in AMT the previous year, according to the IRS. A decade ago, just 140,000 taxpayers were subject to the AMT.
Getting pushed into the AMT zone could cause you to pay hundreds, possibly thousands, more in federal income taxes than you’d otherwise owe. David Klaassen, who is a tax attorney, and his wife, who works in his office, should know. During the last four years, he figures, the AMT has cost his Marquette, Kan., family about $7,000. That doesn’t count what he spent trying unsuccessfully to fight the IRS, contending that the AMT was never supposed to affect families such as his, who have no tax shelters, just a lot of kids.
The AMT was instituted in the late 1970s, when top federal income tax rates hit 70% and the country was rife with shelters that offered huge write-offs for those wealthy enough to invest in them. The aim of the AMT was to ensure that wealthy people paid some tax, regardless of how cleverly they sheltered their income.
To achieve this, Congress created a separate parallel tax system that takes away a number of itemized deductions but imposes tax at a lower rate.
Theoretically, any taxpayer who earns more than set amounts--roughly $45,000 for married couples, $33,750 for single filers--needs first to figure his or her tax via the ordinary method, filling out a 1040 and a Schedule A. (Those with lower incomes need not worry about the AMT.) Then they are required to calculate their taxes a second time by filling out a Form 6251, which figures their tax liability via the AMT. They are supposed to compare their tax liability on the two forms, then pay whichever tax is higher.
In reality, many ordinary taxpayers have never heard of the AMT, and few bother to calculate it. Those who know about it often figure they needn’t bother figuring it because they’re not among the highflying, tax-shelter-buying group that Congress was targeting. But increasingly, the AMT is hitting middle-class people who simply have large families, live in high-tax states or who have high medical or dental expenses. In other words, those who are benefiting from a lot of deductions or credits.
Klaassen, for example, got hit with $3,000 in AMT expenses in 1997 because one of his children was diagnosed with cancer. Although the Klaassens have health insurance, the care that wasn’t covered cost a small fortune. Medical expenses that exceed 7.5% of adjusted gross income are normally tax deductible, of course. But the more one’s deductions mount and taxable income drops, the more likely for the AMT to affect a taxpayer.
“They jump on me and nail me for $3,000 when I’m trying to just keep my insurance policies going,” Klaassen says. “You punish me for being a good parent and bearing my own financial responsibilities? It just doesn’t make sense.”
This year, parents with much smaller families are vulnerable because of generous tax breaks enacted as part of the 1997 tax legislation, such as those giving a $500 per child credit, and those offering $1,500 to $1,000 in tax credits to families paying college tuition expenses.
These new tax credits were exempt from the AMT in 1998, but the exemptions expired in 1999. Unless Congress acts quickly to retroactively extend the exemptions, the government estimates that 1.1 million taxpayers will find that Congress gave them a tax break with one hand and took it away with another.
Congress is aware of the problem.
“We are going to deal with it. The [House] speaker and the [Senate] majority leader are committed to it,” says Trent Duffy, press secretary at the House Ways and Means Committee.
Earlier this year, in fact, Congress voted to eliminate the AMT completely, but the president vetoed that bill, along with a larger package of tax breaks.
For several years, Rep. Bill Archer (R-Texas), head of the House Ways and Means Committee, has been pleading for a drastic revamping of the AMT laws because of the way inflation has been causing the AMT to increasingly reach down into middle class, because levels are not adjusted for inflation each year.
But AMT reform has been a tough sell, in part because few people seem to understand what the AMT is--unless it strikes them personally. And, of course, it is an increasingly large revenue raiser for the government.
In 1987, for example, the AMT affected 140,000 taxpayers who paid a total of $1.7 billion. It is projected to affect 9 million taxpayers in 2009 and generate $19.8 billion in revenue.
Times staff writer Kathy M. Kristof can be reached by e-mail at kathy.kristof@latimes.com.
