Obama wants to lower taxes for middle class by scratching the AMT
President Obama is combining his proposal to raise taxes on the wealthy with a new effort to lower the levy on middle-class Americans.
In his fiscal 2013 budget proposal, the president called for abolishing the alternative minimum tax. It was designed years ago to prevent wealthy people from dodging taxes, but nowadays is blindsiding a growing number of middle-income people.
The president wants to replace the AMT with the so-called Buffett rule, which would require people making more than $1 million a year to pay at least 30% in taxes. It’s named for billionaire Warren Buffett, who has complained that loopholes give him a lower rate than his secretary’s.
The AMT won’t vanish any time soon. Obama listed its elimination as a goal in coming years but did not include it as a line item in next year’s budget.
It’s doubtful that the president’s plan would become law given ardent Republican opposition, analysts said. But the tax is disliked by members of both parties, and it could be revamped or eliminated as part of a comprehensive tax overhaul, they said.
The ATM has two glaring shortcomings, critics say.
First, it doesn’t meet the original intent of preventing wealthy people from circumventing federal taxes through the use of loopholes and deductions, they say. Critics point to Republican presidential hopeful Mitt Romney, who paid an effective rate of less than 14% in 2010 — far below the top ordinary rate of 35% — because much of his income came from capital gains, which are exempt from the AMT.
“It’s a complicated mess,” said Nick Kasprak, an analyst at the Tax Foundation, a nonpartisan research group in Washington.
Second, the AMT increasingly ensnares middle- and upper-middle-income Americans. Because the tax is not indexed for inflation, it strikes people with incomes that would have made them wealthy four decades ago but not today.
It’s especially hard on residents in high-tax states such as California because it disallows or reduces deductions for outlays such as state income taxes.
The AMT hit more than 685,000 California households in 2009, according to the Internal Revenue Service. Nearly 483,000 households had income exceeding $200,000, but an additional 171,000 families made between $100,000 and $200,000.
“Everybody has the same reaction the first time they get hit with the AMT,” said William G. Gale, a senior fellow at the Brookings Institution in Washington. “‘What, I’m on the AMT? There must be a mistake.’”
Congress has enacted a series of “patches” in recent years to spare huge numbers of people from getting hit.
An estimated 4.8 million Americans will be affected by the AMT in 2012, according to the Tax Policy Center in Washington. Without a patch, however, more than 31 million families, or more than one-third of all U.S. taxpayers, would be snagged.
The most recent patch covered 2010 and 2011. There is no fix yet for 2012, but the adjustments often come late in the year when squabbling lawmakers acquiesce on issues with broad consensus.
Without the patches, the average family would have to shell out several thousand dollars more each year.
With a patch, a two-income family earning $250,000 in 2013 would fork over $69,548 in tax, according to the Tax Foundation. That assumes that the George W. Bush-era tax cuts and the current 2% payroll tax cut are extended. Without a patch, the family would hand over $78,105, or an extra $8,557.
But the annual adjustments are not panaceas. Even if they continue, the number of families bumping into the AMT would rise to 9.3 million in 2022, according to the Tax Policy Center.
Though it’s unpopular, politicians have been reluctant to permanently scrub the AMT. That’s a tacit nod to the huge amounts of revenue it generates.
The AMT is expected to bring in $39.1 billion in 2011, according to the Tax Policy Center. Even with continued patches, that would rise to $90.4 billion by 2022, according to the group’s projections.
Politicians resort to temporary measures each year to avoid the predicament of filling the revenue void that would be left if the AMT were scratched, analysts say.
“They do it one year at a time so the cost doesn’t look as big and they can finance it with other stuff,” Gale said.