Costly Alternatives

Author: Perry Bacon Jr

Published: December 11, 2005

April 15 is still several months away, but a little-known provision is looming ever larger: the alternative minimum tax. Although Democrats and Republicans are duking it out over most proposed tax cuts, both are eager to find ways to keep millions of Americans from getting slammed with this so-called stealth tax:

What is the alternative minimum tax (AMT)? This assessment requires people to calculate the amount of federal tax they owe under both the regular income tax code and a flat-tax option, and then pay the higher amount. Created in 1969--after Congress learned that many wealthy people paid no federal income tax because they took advantage of so many tax shelters and exemptions--the AMT taxes all income at either 26% or 28% and allows few deductions.

How many people will have to pay it this year? About 3.5 million households, 57% of which earn between $200,000 and $500,000, according to the nonpartisan Tax Policy Center. Their tax bills will be an average of $4,599 more than they would be using the regular tax code.

And how many people will be subject to it in the future? Some19 million families by 2007, including 64% of households earning $100,000 to $200,000. The AMT is not adjusted for inflation, and recent cuts have lowered rates under the traditional tax code, making many middle-class people subject to the AMT.

What is Washington doing to keep this from snowballing? Congress is working on a one-year patch that will cost $31 billion in lost revenues. But after the House approved such a fix last week, the G.O.P. pushed through $56 billion in tax cuts on capital gains and dividends. That set up a fight this week in the Senate, where a few moderate Republicans are siding with Democrats to keep those cuts from passing.