Taxing Problem

Alternative minimum tax catches many by surprise

Published: April 10, 2005

ANCHORS: CHARLES OSGOOD

REPORTERS: JOIE CHEN

April 10, 2005

TAXING PROBLEM?

CHARLES OSGOOD, host:

How can one provision of the tax code pose such a growing and Taxing Problem? They call it the alternative minimum tax, but for more and more taxpayers every year, it's creating the maximum of aggravation and expense. Our cover story is reported by Joie Chen.

(Footage of oil wells; beach; real estate sign; limousine; New York Stock Exchange)

JOIE CHEN reporting:

(Voiceover) Say the words `tax shelter' and certain images come to mind--oil wells, Caribbean bank accounts, real estate. You know, the legal investments rich people use to hide their money and pay less taxes.

(Footage of the Gunther children; Gary Gunther)

CHEN: (Voiceover) OK. What about four-year-old Mary Grace Gunther and her five-year-old sister Charlotte? Tax shelters? What about their brother Franklin or Billy or Greg? Nine children in all. Or what about their house in Annapolis, Maryland? It's been in the family for two generations. Is that a tax shelter, too? Gary Gunther's a contractor at the US Naval Academy and yes, he makes a comfortable living. But a millionaire? Far from it. His wife Mary home-schools their kids, and when he sat down to do his taxes three years ago, Gary found out the government thinks he's a fat cat.

Mr. GARY GUNTHER (Taxpayer): I came across a page and it talked about filling out a little work sheet to see if you were eligible for the AMT, and I almost went by it because I said, `Well, that's not me.' But trying to be diligent, I worked through the work sheet and lo and behold, I said, `Oh, I am subject to this. What's the impact going to be?'

(Footage of the Gunther family)

CHEN: (Voiceover) That AMT, the alternative minimum tax, cost Gary's family an extra $2,500 in taxes, money that could have been used for other things.

Mrs. MARY GUNTHER (Taxpayer): Shoes, braces, clothes, even if you get them from the second-hand store, which we're pretty good at doing. About a month of food for us, I guess, is about that much money, so...

Mr. GUNTHER: Well, actually two months.

Mrs. GUNTHER: Two months, yeah.

CHEN: So how did we end up with an alternative minimum tax? Well, back in the late 1960s lawmakers were outraged to find out that some rich Americans, folks making more than $200,000 a year, were getting away with paying no taxes. So they leaped in and tossed out some very common deductions for those rich people, stuff like kids, real estate taxes, state income taxes and some medical expenses. Again, the idea was to target the rich. But Congress never updated its definition of just how much money makes you rich. Adjusted for inflation, the AMT should now be targeting Americans with incomes of $1.2 million and up. But since it affects wage-earners making much less than that, more and more middle-class Americans are getting hit with a tax which was never intended for them.

Mrs. GUNTHER: Just don't feel like we were the original--we're the kind of targeted audience for AMT as it was originally enacted. I mean, the fat cats relate to standards of living with the yachts and two or three homes and traveling to Europe. That's not the way we live. But again, I just don't think we're the super-rich family that they're looking for.

Mr. LEONARD BURMAN (The Tax Policy Center): Next year, if Congress doesn't change the law, there's going to be a third of people with incomes between $75,000 and $100,000 paying the tax. Those aren't rich people. It's a cop married to a nurse.

CHEN: (Voiceover) Leonard Berman runs The Tax Policy Center in Washington.

Mr. BURMAN: In theory, every person in the United States should be filling out a Form 6251.

(Animated footage of tax forms)

CHEN: (Voiceover) We all know about the 1040 form, but there, on line 44, is the instruction telling you to fill out another tax form, the 6251. That's where you toss out many of those tax deductions you already took, assuming, of course, you can decipher the instructions.

Mr. BURMAN: `The total of Form 6251 lines 8 through 27 is negative and line 31 would be greater than line 34 if you did not take into account lines 8 through 27.'

CHEN: Huh?

Mr. BURMAN: Yeah, that's my reaction. I have no idea what that means. I--that's why I use tax software.

(Footage of tax forms being filled out)

CHEN: (Voiceover) What it means is that you have to do all your calculations a second time, and then pay the higher tax.

Mr. BURMAN: A lot of people who get on the AMT first learn about it when the IRS sends them a notice saying `You thought you had a $1,500 refund coming,' because actually you owe $2,000 because of the alternative tax plus interest and maybe plus penalties.'

CHEN: (Voiceover) In this current tax year, only 4 percent of Americans will be hit with the alternative minimum tax. Not to worry, right? But without any changes, five years from now, in the year 2010, almost a third of all taxpayers will pay AMT.

(Graphic on screen)

TAXPAYERS PAYING ALTERNATIVE MINIMUM TAX

2005 3.8% 2006 20.4% 2010 30.4%

Source: The Tax Policy Center

CHEN: (Voiceover) Married with two kids and earning between $75,000 and $100,000 a year? Well, in the next 10 years the number of you paying the AMT will go from less than 2 percent to almost 95 percent.

(Graphic on screen)

MARRIED WITH TWO CHILDREN $75,000 - $100,000

2005 1.6% 2006 77.1% 2010 94.4%

Source: The Tax Policy Center

(Footage of "The Brady Bunch")

CHEN: (Voiceover) And if you already have a large brood--say if Mike and Carol Brady were real people--our tax expert says they'd be paying the price.

Mr. BURMAN: If you have six kids and you're earning $100,000, you're probably on the AMT. The Brady bunch is on the AMT.

(Footage of Greg Dyer and Chen)

CHEN: (Voiceover) Accountant Greg Dyer says this time of year, he's seeing a lot of modern Brady families streaming into his office.

How quickly have you seen this escalate?

Mr. GREG DYER (Accountant): Well, last year on the returns we prepared, about 50 percent of the people were hit by the AMT. This year we're anticipating it's going to be about 80 percent.

CHEN: Eighty percent?

Mr. DYER: Yeah.

CHEN: Most of the people.

Mr. DYER: Just about everybody.

CHEN: And I guess that's a surprise.

Mr. DYER: It is to them.

(Footage of suburban Maryland)

CHEN: (Voiceover) Dyer's office is just outside of Washington in suburban Maryland, where housing prices are going through the roof, not to mention property taxes. But under the AMT, those property taxes are not deductible.

(Footage of map of US with high-tax states highlighted; suburban neighborhood)

CHEN: (Voiceover) You can't deduct your state income taxes, either. So if you live in a high-tax state like New York or New Jersey, numbers one and two on the nation's top 10 list, you're probably going to be paying the AMT. Maryland, where Dyer works, ranks number six.

(Footage of Dyer and Chen)

CHEN: (Voiceover) He says one of his clients will lose $17,000 in state and property tax deductions this year.

Mr. DYER: Their regular tax was $34,000 this year. But then they paid an extra $2,000 of AMT tax, which was almost a 6 percent increase over their regular base tax bill.

CHEN: So when you called to break the bad news....

Mr. DYER: I had somebody hang up on me once when I told them what their tax was, and most of it was from ANT--AMT.

CHEN: Do they think you must be wrong?

Mr. DYER: Absolutely.

(Footage of people picking up tax forms)

CHEN: (Voiceover) Just about everyone who does know about the AMT agrees it'sbad. Even the head of the Internal Revenue Service calls it `horrific.'

(Footage of Alan Greenspan and Connie Mack)

CHEN: (Voiceover) Former Republican Senator Connie Mack says it's worse than that.

Former Senator CONNIE MACK (Republican, Florida): I would put it almost at the point of saying it's despicable.

(Footage of commission meeting)

CHEN: (Voiceover) Mack is co-chair of the President's tax commission, which is to propose changes this July. He says they'll be looking closely at the AMT.

Mr. MACK: It doesn't work. It's atrocious. It destroys confidence in the tax system. It undermines government. It's just terrible.

(Footage of the Capitol)

CHEN: (Voiceover) So Congress will surely fix it, or throw the whole thing out, right? Well, don't bet on it. The AMT brings in a lot of tax revenue.

Mr. MACK: The cost of eliminating the AMT over a 10-year period is about $1.2 trillion.

(Footage of IRS building; tax preparers; the Gunther family; Berman)

CHEN: (Voiceover) So, no, the AMT is not going away, at least not anytime soon.

Remember the Gunthers? They owe an extra $3,000 in tax this year, and tax expert Leonard Berman says when he thinks of the AMT, he thinks of a poster he once saw for the 1958 horror flick "The Blob."

Mr. BURMAN: ...had the old movie poster, "The Blob." And it said, `indescribable, indestructible, nothing can stop it.' It's actually a perfect description of the AMT, indestructible, indescribable, nothing can stop it.

(Footage of mock horror movie; visual of SUNDAY MORNING sun logo; footage of "Fever Pitch")

OSGOOD: Ahead, Hollywood's Farrelly brothers take the field.