Repeal of AMT would benefit New Yorkers

Alternative minimum tax keeps hitting more middle-income to higher-middle-income people

Author: David Robinson

Published: July 22, 2005

Hamburg financial planner Peter Aleksandrowicz knows all about the sting that upper-middle class New Yorkers can feel from the alternative minimum tax.

He's already had his federal income tax bill driven up by the AMT, which was designed to snag wealthy tax dodgers but now is pushing up federal income tax bills for more affluent members of the middle class.

"It was a good amount of bucks," he said Thursday.

That's why Aleksandrowicz was thrilled to hear that a presidential panel recommended Wednesday that the alternative minimum tax be repealed before it cuts an even wider swath through the nation's middle class.

"It's time to get rid of it," Aleksandrowicz said. "It's gotten to the point where it's not just affecting the type of people it was designed to hit. It keeps hitting more middle-income to higher-middle-income people."

That's especially true in New York, where higher taxes and living costs combine to produce the big deductions and above-average incomes that are particularly susceptible to the AMT, compared with lower-tax states.

"It's not a fair tax," said David A. Schlein, a partner at Lumsden & McCormick, a Buffalo accounting firm. "It's a regressive tax that hurts us more than people in Florida."

A married couple in New York with an income of $150,000, three children and normal deductions, would pay an additional $4,058 under the AMT next year - a bigger hit that a similar family in any other state would face. That same family in Tennessee would pay an AMT of $1,243, according to research by Leonard E. Burman, the co-director of the Tax Policy Center.

While just 4 percent of New York taxpayers are currently affected by the AMT, it hits about a third of all families in the state with incomes above $100,000, according to a study by the Manhattan Institute for Policy Research. Most of those families have children and the bulk of them live in New York City or its suburbs, where incomes tend to be higher than in the Buffalo Niagara region, said E.J. McMahon, the report's author.

Without changes in the tax law, McMahon warns it will only get much worse for New Yorkers over the next five years. By 2010, the AMT will hit a quarter of all New York taxpayers and be firmly entrenched among the middle class, affecting two of every five New Yorkers earning between $50,000 and $100,000, the institute predicts.

"If nothing is done, basically every home-owning family with kids in New York state will be paying the AMT if they itemize," McMahon said.

That's because the AMT, without changes, essentially will become the new tax system for millions of Americans, driving up tax bills and reducing the value to residents of high-tax states like New York of common deductions for things such as state and local taxes, dependent children and even the interest paid on mortgages and home equity loans.

The AMT also hits married taxpayers much harder than it does single filers. This year, for instance, the standard deduction for married couples is twice that for single filers. But under the AMT, the exemption for married filers is just 37 percent bigger than it is for singles, making it far more likely that couples will be subject to the tax. By 2010, the Congressional Budget Office estimates that nearly 40 percent of all married taxpayers will be affected by the AMT, compared with just 5 percent of all unmarried filers.

The difference between paying the AMT and regular federal income taxes can be substantial. The average U.S. taxpayer who was subject to the AMT last year paid an additional $6,000 in taxes, according to Tax Policy Center estimates.

Because a temporary increase in the amount of income that can be exempted from the AMT is set to expire at the end of this year, many more taxpayers would be subject to the tax next year. And because the exemption is not indexed to inflation, the AMT will snare even more taxpayers in succeeding years.

Nationally, roughly 35 percent of all taxpayers with incomes between $50,000 and $100,000 will be subject to the AMT by 2006, up from slightly more than 1 percent this year. By 2010, two-thirds of the 26 million taxpayers with earnings in that range will owe more tax as a result of the AMT, the Congressional Budget Office projects.

Nearly half of all married taxpayers with three or more children will be subject to the AMT by 2010, the CBO predicts. Almost nine of every 10 married filers with two or more children and earning between $75,000 and $100,000 a year will be subject to the tax by the end of the decade, up from just 2 percent today, according to the Tax Policy Center.

In contrast, about 30 percent of the wealthiest taxpayers - those earning more than $1 million - will be hit by the AMT because their highest regular tax rate of 35 percent is above the AMT's top rate of 28 percent.

"The AMT was supposedly to get rid of the wealthy tax cheats," Schlein said. "Now, there are a lot of people who are subject to it who shouldn't. These aren't rich people. A couple of teachers earning $60,000 to $70,000 can do it."

But repealing the AMT won't be easy. The tax, which was originally aimed at 155 wealthy taxpayers who paid no taxes in 1969, now affects 4 million U.S. taxpayers and will hit 31 million by 2010, largely because less income is scheduled to be exempted from the tax beginning next year. Without any changes in the law, the AMT will bring in more tax revenue than the conventional income tax by 2013, the Treasury Department predicts.

The tax is expected to generate $20 billion this year, or a little more than 2 percent of all income tax revenue. But the AMT will generate nearly $38 billion in 2006 and $112 billion in 2010 under the current law, based on projections from the Urban Institute and Brookings Tax Policy Center.

Because President Bush instructed the tax reform panel to develop restructuring ideas that would raise the same amount of tax revenue as current laws, adopting its recommendation that the AMT be repealed means that the group of nine tax experts must find ways to replace that revenue. The panel has not made a decision on alternate sources of revenue.

Simply repealing the AMT would reduce tax revenues by about $600 billion over the next decade, which would put a huge dent in a federal budget that already is producing annual deficits that top $300 billion.

Short of repeal, other options for reforming the AMT also carry hefty price tags. Making the current exemption levels permanent and indexing them for inflation would reduce the number of taxpayers subject to the AMT to about 7 million in 2010 - almost twice the current number but three-quarters less than would be under the existing law. That would cost the Treasury about $385 billion over the next decade, the CBO estimates.

Yet the sheer scope of the AMT's ever-widening web leads many to predict that Congress and the Bush administration will take some action to scale back the tax's projected growth. In past years, that has meant adopting temporary fixes to prevent the AMT from growing as fast as anticipated.

Taxpayer advocate Nina Olson, who for years has urged the repeal of the AMT, has called the tax a time bomb that is set to go off within the next five years and warned of a political backlash if the tax extends its grasp unabated.

"I don't think taxpayers will stand for it when the AMT begins to hit tens of millions of taxpayers within the next few years," she told a Senate Finance Committee hearing in May.

"We can't continue to live with it the way it is," McMahon said.