Tax trap for wealthy also snares middle class

Author: Elizabeth Leis

Published: March 15, 2005

This year more than a third of middle income families in Anne Arundel County are in danger of being caught by a law created a generation ago to prevent the wealthy from avoiding their fair share of taxes.

And it will only get worse. Within five years, 94 percent of married couples with two children making $75,000 to $100,000 will see their tax bills rise by thousands as they fall under the law.

"It's really brutal, it's terrible," said Gary T. Mott, owner of an accounting firm in Severna Park. "It's worse than it sounds, the AMT."

Congress created the alternative minimum tax in 1978 as part of an effort to prevent those with the highest incomes from shielding themselves from federal taxes. When a wealthy taxpayer's bill shrinks thanks to lower rates or bigger deductions, the AMT kicks in to boost it back by several thousand dollars.

The tax allows far fewer exemptions than regular tax schedules, and eliminates the deduction for dependents. By law, taxpayers must pay whatever is higher, taxes under regular rules or the AMT.

Two trends have made the tax more of a threat to middle income households. Congress didn't make the law adjustable for inflation. So as incomes have gone up, so have the number of people affected.

And the 2001 tax cuts lowered the tax rate for many families, effectively pushing them up into the AMT. The result is that taxpayers who do not consider themselves wealthy are finding themselves caught.

"It's safe to say married couples making $75,000 to $100,000 - that's middle class America," said Katherine D. Gibb, a senior tax advisor for Edward F. Mullen CPA in Annapolis.

Anne Arundel County residents are hit hard because of the high income levels here. Households with income higher than $75,000 are most likely to be hit - 38 percent of county households, according to the latest Census figures. Married couples are another likely target because of their combined income - and they represent 57 percent of county households.

Mr. Mullen said most of his 800 to 900 clients have to pay the AMT.

"It's every return, almost, that we look at because of the income of our taxpayers," he said.

His clients are not alone. Nationally, the number of taxpayers shelling out for the AMT is expected to grow from 1 million in 1990 to around 30 million in 2010, according to the Tax Policy Center in Washington D.C. The center is a cooperative venture of the Urban Institute and Brookings Institution in Washington, D.C.

"It gets worse over time," Jeff Rohaly, the director of tax modeling with the Urban Institute, said. "The example we use is that a married couple with two kids making between $75 to $100,000 this year have a 1.6 percent chance this year and 94 percent chance by 2010."

While Maryland isn't as heavily impacted as states like New York or California, state and local taxes are a big deduction that disappear under the AMT.

"Maryland income tax rate is so high..." he said. "On regular calculations you're allowed to deduct state and real estate taxes... On AMT, you have to add them back."

The Tax Policy Center is not the only group hollering for reform. Taxpayer Advocate Service, an independent organization within the IRS, said that 65 percent of married couples with two or more children with adjusted growth income of between $75,000 to $100,000 would pay the AMT in 2005. It asks Congress to kill the AMT every year.

The groups will get a chance to repeat their cases for dumping the tax this year as an advisory commission created by President Bush begins study of ways to overhaul the nation's tax laws.

But in the meantime, Mr. Mott and other accountants will have to keep on breaking the bad news to clients.

"It's a big, big mess," he said. "We all knew it was coming, this year seems like the worst year ever. You have to say to some clients 'you know that boat you have on the Severn? It's not tax deductible.' "