Most Americans have not had to deal with the alternative minimum tax because it is a tax that is designed to make sure that rich people pay taxes. There are other elements involved, however, that make this tax very important to every American. It invalidates many of the items on Schedule A that reduce taxes for the general public, and it makes depreciation take longer for business items. It can be disastrous if you make the wrong decision on a stock option that has lost its value, and it has many other implications for those fortunate enough to have money to protect.
If you prepare your taxes on a computer program, the program will automatically compute the alternative minimum tax, and compare its automatic computation to the regular tax, so that you generally never see or never give any significance to the alternative minimum tax figure.
But we have to beware, because the most important aspect of the alternative minimum tax is that it has never been adjusted for inflation. When it was passed in 1969, a person could buy a house and a Cadillac for $25,000. Times have changed since then, but the limits for the preferred items on the alternative tax list have only been temporarily adjusted by Congress. Tax preparers hold their breath each year, wondering if Congress will extend this “tax patch” for one more year so that their clients will be off the hook once again.
According to TheMiddleClass.org, a watchdog site for Congress, this tax is ripe for real reform, but Congress is reluctant to get off the fence. In 1970, 20,000 taxpayers were subject to the alternative minimum tax. After a tax patch was passed in 2007, 4.1 million taxpayers were subject to this tax. If Congress had not acted to extend the patch in December of 2010, 33 million taxpayers would have been subject to the stricter rules.
It is clear that the alternative minimum tax is a necessary action to make sure that the richest people in America are paying taxes, but the current manipulation of tax codes, and the complexity of the tax, along with modern loopholes that aren’t addressed in the original legislation needs to be addressed in the near future. Repealing the AMT isn’t much of a solution without significant replacement legislation. The AMT generates more revenue than the regular tax code, but it clearly isn’t generating that income from many people who should be paying it. According to the Tax Policy Institute, its chief victims are families with lots of children in high-tax states, while hedge-fund managers have found creative ways to avoid it.
Manipulation of taxes will never solve the problems that the economy faces, but conscious pandering to the super-rich certainly isn’t a solution, either. The time-bomb of the alternative minimum tax is still hanging over the heads of American families.