Alternative Minimum Tax Report
Introduction
The Alternative Minimum Tax (“AMT”) presents hardships to the practitioner as well as the taxpayer who prepares his own return by, as its name implies, imposing a second tax calculation mechanism on taxpayers. This mechanism brings with it major record keeping and calculation complexities, yet serves virtually no useful purpose-other than the raising of an ever-increasing amount of tax revenue. But as has become very clear in recent years, this increase in tax revenue is not coming from taxpayers who were the intended targets of this tax.
Summary of Conclusion
The AMT does not serve the purpose for which it was intended and functions in a most inequitable manner while adding enormous compliance burdens. It should therefore be changed to eliminate the adjustments for state and local taxes and miscellaneous deductions, update its rates, and modify its exemption.
Discussion & Analysis
The AMT was instituted in its present form when the prior “add on” Minimum Tax” was transformed into the AMT in the early 1980’s. Its “stated” purpose was to require that all taxpayers paid at least a fair share of tax. It was to do this by identifying “loophole” type deductions. {These are referred to as either “preferences” or “adjustments” in the law, and will be referred to hereinafter as “preferences”}. There would then be an alternative calculation using lower tax rates applied against this taxable income as increased by the preferences. However the AMT was seriously flawed from the outset. Instead of focusing on these loophole type preferences (which would have limited the tax to a very small number of tax law “abusers”), the law that was passed included items that were not loopholes at all. And it was then imbedded in an exemption structure which guaranteed that over time all taxpayers would be moved towards paying this tax.
From the beginning, a very substantial majority of all AMT paid by taxpayers results from the following four factors:
- Treating state and local taxes as a preference
- Treating miscellaneous deductions as a preference
- Not modifying the rate to correspond to changes in the regular income tax rates.
- Allowing lower exemptions than the regular tax.
Each of these, however, can be quickly shown as innappropriate factors with which to base a tax system intended to just make sure everyone pays a “fair share” of tax.
- State and local taxes are hardly a loophole. The taxes exacted by state and local governments are hardly “voluntarily” paid by taxpayers in an attempt to avoid paying federal taxes. Furthermore, reducing a taxpayer’s federal tax liability because he has already paid state and local taxes on that same income already is hardly a loophole.
- Miscellaneous deductions is the category of deductions that consists primarily of expenses incurred to earn income that is subject to tax. It includes unreimbursed employee expenses, investment expenses, etc. This is the most basic and important deduction needed to have a truly fair income tax system. For example, if an individual pays a lawyer a fee for collecting back wages, the legal fee is a miscellaneous deduction. If an individual pays the lawyer $300 for collecting $1000 of back pay, netting $700, the AMT would tax the individual on the full $1000.
- The AMT rate is generally 28%. This was its rate when regular tax rates were 39.6%. Regular tax rates have dropped, but the AMT rate remains at 28%.
- The exemption available under the AMT tax system is a fixed dollar amount which, unlike exemptions and standard deductions under the regular tax system, is not indexed for inflation. Furthermore, it is phased out entirely over certain income levels. That an AMT liability could be caused (or increased) by simply having a lower exemption than the regular tax makes a mockery of the original intent of the AMT. By not keeping this exemption at least as high as the exemption and lower brackets of the regular tax, Congress has simply foisted an illogical and inequitable tax increase on its unsuspecting constituency.
Conclusion
The AMT in its present form has no place in the tax law. If it is kept at all, the addbacks for taxes and for miscellaneous deductions must be eliminated, the rate modified to be appropriately related to regular tax rates, and the exemption made comparable (or greater) than the exemption for purposes of the regular income tax. The AMT is absurdly difficult to administer because of its complex provisions, illogical and inequitable effects, and uncertain interaction with other provisions of the Internal Revenue Code. It is inequitable in the highest order, placing maximum burden on those to whom the most rational elements of the Internal Revenue Code would otherwise apply.