News & Events In the Media 

A taxing situation faces state, nation

Author: Dave Beal

Published: August 1, 2004

Just about everyone who has looked at the alternative minimum tax agrees that this tax has become a nightmare.

Nina Olson, the federal government's National Taxpayer Advocate, calls it one of today's two most serious problems for taxpayers. As for tomorrow, Olson and many others see the AMT as a ticking time bomb, on course to become the worst feature of our tax system. That would be quite an achievement, considering what a mess this system has become.

You'd never know that, listening to the campaign rhetoric coming out of the Democratic National Convention last week. Rarely did the AMT merit attention.

President George W. Bush didn't even think the topic worthy of mention several months ago, in his annual State of the Union address.

"The Bush administration has actively made the AMT problem worse by cutting regular income taxes," says Brookings Institution economist William Gale. Overall tax reductions are interacting with existing tax provisions to subject more taxpayers to the AMT, thereby erasing a significant portion of the savings the Bush administration claims it is delivering.

Gale adds that the John Kerry campaign has not focused directly on the AMT issue, but says its proposal to repeal some of the high-income tax cuts "would have the beneficial effect of reducing the number of taxpayers on the AMT."

The AMT is a parallel tax to the regular income tax. The theory behind it, at both the state and federal levels, is to make sure that taxpayers who benefit from some tax breaks pay a minimum amount of tax relative to their income.

The federal AMT was enacted in 1969, after widespread outrage over a study that found 155 wealthy individuals didn't pay any federal income taxes. It was designed to make sure those people would face some tax liability.

The unintended consequence of this change -- that it now works to levy higher taxes on a steadily rising share of middle-income filers -- has become the predominant characteristic of the AMT. As incomes have risen because of inflation or other factors, the AMT has hit more taxpayers. Various exemptions are not indexed to rise with these factors.

All federal taxpayers except 1040EZ (short form) filers are required to add up all their deductions and exemptions as if they were filing a regular income tax return. Then they must add them up the AMT way. Whichever tax liability turns out to be higher is the amount they must pay.

Both federal and state AMT rules won't allow exemptions for dependents --$3,050 for each dependent last year -- thus penalizing large families. Both also won't allow property tax deductions.

Congress has done little to arrest the damage being done by the AMT.

MINNESOTA'S TAX PROVISIONS

The alternative minimum tax has become a growing issue in Minnesota, too. A fourth of the 50 states, including Minnesota and Wisconsin, also levy the tax.

Accountants say Minnesota has one of the worst state AMTs, yet lawmakers' attempt to fix it failed in this year's legislative session.

Minnesota's AMT is significantly tougher than the federal one. The state, unlike the federal government, won't allow deductions for home mortgage interest, certain charitable deductions or gambling losses. Because mortgage loans have climbed with rising housing prices in recent years, this factor has loomed ever larger in Minnesota.

Minnesota's AMT is particularly onerous because, "it takes all the bad things from the federal AMT and makes them worse," says Jim Daleiden, a CPA at the Boulay Heutmaker Zibell accounting firm in Eden Prairie.

Also, Minnesota's AMT exemptions kick in at significantly lower income levels than do exemptions for the federal AMT.

Accountants have become more concerned about the issue because they find themselves increasingly delivering bad news to their clients. CPAs crunching the numbers for taxpayers are finding that suddenly, clients have come under AMT provisions that require them to pay hundreds or even thousands of dollars more in individual taxes.

CPAS TAKE ON THE AMT

This year, the Minnesota Society of CPAs took on the AMT. In meetings with legislators, media representatives and others, society members explained the tax and its shortcomings.

They outlined 15 case studies of the problems Minnesotans have encountered with the state and federal alternative taxes. In the two cases shown in the accompanying graphic, the state AMT drove overall state income taxes higher than the federal tax bite.

The society projects that 125,000 Minnesota taxpayers coming under the AMT will pay $102 million to the state in 2007, up from just 5,300 filers paying $18.4 million in 1995.

Minnesota Department of Revenue analysts see much lower numbers for 2007 -- 43,000 AMT filers and $53 million -- after cutting their earlier estimates. Research director Dick Gebhart says the department doesn't have estimates on AMT filers and what they paid before 2001.

Whatever the number, it's climbing. And as it climbs, the increasing cost of fixing the problem is rapidly becoming a major economic and political issue in Minnesota and the nation.

Easing AMT provisions, or abolishing the taxes, would cut tax revenue harvested by federal and state governments. Many politicians often argue that their budgets are too tight as it is, thus they are reluctant to do much about the AMTs beyond temporary fixes.

"Everyone agrees that the problem has to be fixed," says Todd Koch, a CPA at the John Knutson & Co. accounting firm in Falcon Heights. "They just don't want to identify whose taxes should go up to raise the same revenue."

"Without average people calling their legislators or Congress, nothing will happen."

If you find yourself suddenly thrust into the eye of the AMT hurricane, here's a suggestion.

Call your legislators. Write a letter to the editor. Stand up and scream. Eventually, the gathering screams will become so deafening that we'll get some action.