Politics & Government

A primer on the Alternative Minimum Tax, or AMT

Q: What is the AMT?

A: It’s a parallel tax to the regular income tax. It was created by Congress in 1969 to close tax shelters that the richest Americans — those with incomes over $200,000 then — exploited to avoid taxation.

Q: Who paid it last year on 2006 income?

A: Only 0.7 percent of all single tax filers were hit — they were overwhelmingly earning from $200,000 to $500,000. Absent a patch, this number would grow to 1.6 percent of all single tax filers this current tax year. By comparison, 7.4 percent of married taxpayers with children were hit with the AMT last year, almost all of them with combined income of $200,000 or more. Altogether, some 4 million tax filers paid it.

Q: If it isn’t patched, who else might pay it on 2007 income?

A: Some 70.8 percent of families earning from $75,000 to $100,000 could face the AMT, and 97 percent of families earning from $100,000 to $200,000 could face it. Altogether, some 23 million tax filers could pay $2,000 or more in extra taxes.

Q: Why’s the AMT a problem now?

A: The AMT was never indexed to rise with inflation. That means what was considered sky-high taxable income back in 1969 is middle-class income today in expensive areas. Congress typically passes a one-year fix to limit its bite. But this year Democrats and Republicans are at odds over how to fix it.

Q: How do I know if I'm vulnerable to it?

A: You must calculate your income taxes two ways — once the regular way, once under AMT rules.

Q: Who is most at risk for the AMT?

A: A tax filer taking lots of deductions. That means married couples with lots of children, high-income filers who deduct sales taxes and interest on home loans, and particularly people in states with high property taxes that are deducted from federal income taxes.

Q: Which states or places have the biggest AMT hit because of high property taxes?

A: New Jersey, New York, Connecticut, the District of Columbia, Maryland and California historically have the highest percentage of tax returns subject to the AMT.

Q: Which states have the lowest percentage of filers subject to the AMT?

A: Lowest is South Dakota, followed by Mississippi, Tennessee, Alaska and Alabama.

Q: If there isn’t an AMT patch, taxpayers in which states could face the most in new taxes?

A: In order, California, New York, Texas, New Jersey, Pennsylvania, Illinois, Florida, Michigan, Ohio, and Massachusetts, according to the House Ways and Means Committee.

Q: What does the fix, or patch, do?

A: It essentially freezes the AMT at a point where it hits about 4 million tax filers, instead of 23 million.

Q: So why not patch it?

A: The AMT is projected to haul in more than $850 billion in tax revenues over the next decade. A lot of official assumptions about future government finance assume that the AMT will be collected. To repeal the AMT and offset the massive hit that would deliver to the federal budget, Congress would have to cut spending, raise taxes or both.

Q: Will Congress patch the AMT?

A: Democrats say yes. They’ve pledged to offset lost AMT revenues with spending cuts or tax hikes to prevent deficit spending — especially by raising taxes on hedge-fund managers. But Republicans threaten to block a patch that raises taxes to make up for lost AMT tax revenues. When they controlled Congress, they fixed it on a once-a-year basis without offsetting the lost revenue, which made annual budget deficits larger. ON THE WEB

An example of how the AMT threatens a middle-class family - see page 4.

More on the House Democrats AMT patch.

The Republican response on the AMT patch.

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