‘Stealth tax’ grabbing middle-income taxpayers

The Alternative Minimum Tax has been called the “stealth tax” for good reason: It’s been sneaking up on middle-income taxpayers for a number of years.

First conceived in 1969 to stop a couple of hundred millionaires from paying no taxes at all, the parallel tax is now compelling an increasing number of unsuspecting middle-class families into paying more.

Though it’s still affecting fewer than 10 percent of U.S. taxpayers, a number of consumer and financial interest groups are up in arms about the future impact of the tax. Congress, which has reviewed at least eight bills calling for the repeal of different aspects of the AMT, is studying ways to remedy the problem.

Some just think of it as another tax-time nuisance, since millions fill out AMT forms each year before finding they’re not required to pay it.

“It’s a nightmare,” said James Lewis, vice president of the Portage accounting firm Siegfried Crandall PC. “People look at it and say ‘What is all this stuff?’ It’s made itself way too complicated.”

Because the AMT is not indexed to keep pace with inflation, more people find themselves subject as incomes rise. Ironically, the increasing number of deductions and credits providing tax relief to low- and middle-income people can trigger the AMT if subjects appear to be paying too little when filing Form 1040.

“Families earning $100,000 today aren’t super-rich,” said Chris Kinnan, director of public affairs for the grass-roots lobbying association Citizens For a Sound Economy. “But the AMT law is stuck in 1969 and still thinks they are.”

A record 12.3 million taxpayers — double the numbers from 2002, representing about 9.5 percent of the 130 million who will file — were expected to be subject to the AMT in 2003 taxes. Because it was originally designed to prevent high-income individuals from using loopholes, tax shelters or special benefits to pay little or no federal income tax, big money-makers may be accustomed to the AMT. But this year an estimated 2.6 million middle-class taxpayers will unintentionally be caught in the net.

How it works

The AMT works like this: taxpayers likely to be liable start by calculating their taxes under regular rules on Form 1040, then tally their AMT liability on Form 6251, which allows a special exemption, reduces certain other benefits and applies rates of 26 percent to 28 percent. Filers then pay the higher of the two taxes.

How do you know you’re liable? If you or your tax preparer use computer software for taxes, it should automatically determine your AMT liability or lack thereof; if not, Form 1040 includes instructions on determining liability.

Beyond that, summarizing the many factors involved can be complex, said longtime Portage tax preparer Chuck Dietz. In general, he said, the liable this year will fall into one of the following brackets:

# Those who are married, filing jointly and earning more than a combined $58,000.

# Those who are married, filing singly and earning more than $29,000.

# Single people earning more than $40,250.

Within those groups, Dietz said, those with significant deductions for expenses like property taxes, business-related travel or income from foreign investments are more likely to be subject.

Others likely to be affected now or later may be those exercising incentive stock options through firms like Pfizer Inc., Lewis said.

“Stock options are a preferential item,” he said, “and people will be hit with that.”

The AMT-liable who inadvertently pay regular taxes instead will probably not be penalized, Dietz said. Instead, the IRS will adjust their tax-return check or notify them that more money is owed, he said. The other good news, Lewis said, is that some or all of an AMT payment may be credited to future taxes depending on the nature of the liability.

Lewis said thus far he is aware of few local people who have paid more than incremental increases under the AMT.

“But when this starts hitting a lot of homeowners, we’ll hear more cries for restitution,” he said. “I think we’re going to start seeing significant problems in 2005, when more people will be subject — with no changes to their tax situation and through no fault or pre-planning of their own.”

Right now the provision is weighing in more heavily on states like California, New York and Massachusetts that charge higher property taxes, and tax preparers there are reporting more resistance.

Most accept tax

Kalamazoo Tax Attorney Matthew S. DePerno said about 50 percent of his clientele are subject each year to the AMT, but he hears few real objections.

“Most of the people I deal with who have the AMT are generally opposed to it … but in general they accept it,” he said. “If they’re subject to a high income to tax, it conversely means they’re denied certain deductions that others would normally get — and in that sense, it makes sense.”

Dietz, who has worked as a tax preparer for 30 years, said that only four of the 350 returns he will file this season have thus far been subject to the AMT.

“None were middle class; all were high-income people with major deductions,” he said. “One who earns $318,000 only paid $300 more than his regular taxes. In most cases it (the tax) does what it’s supposed to do.”

Groups including the IRS National Taxpayers Advocate and the American Institute of CPAs have recommended that the ATM be repealed now, a view shared by Lewis, Dietz and DePerno.

First introduced in 1969 as the Minimum Tax, the tenet was a reaction to a report that 155 people with a gross income more than $200,000 did not pay taxes in 1967.

This year, the Treasury Department projects that AMT receipts from 2003 taxes will total $17.9 billion. Also, because the tax overshot its aim, more than half of all U.S. income is projected to be taxed under the AMT by 2010. In other words, said a report by independent research group the American Economic Association, by then it would be cheaper to repeal the regular income tax.

The 2001 Congressional committee report estimated that it will apply to 17 million people by 2010, while IRS National Taxpayer Advocate Nina Olson said that number could be as high as 32 million.

Gazette wire services contributed to this report.

© 2004 Kalamazoo.