AMT on Chopping Block

Yes, Kill This UGLY Tax

Taxes are UGLY when they are unfair and stupid.  The Alternative Minimum Tax (AMT) meets the two criteria for UGLY and then some.

What makes the AMT unfair is that it taxes your deductions.  What makes it stupid is why do lawmakers bother giving you the deductions in the first place?  It happened in 1982 when lawmakers were in a tax panic, which we will explain later.  First, let’s look at how the AMT works.

The AMT is a stealth tax system that runs parallel to the regular system, except that it has different tax rates, exemptions, and deductions.  When you do your taxes, the law makes you compute both your AMT and regular taxes, and then pay the larger amount.

To calculate your AMT, you start with your 1040 income after itemized or standard deductions.  Then you add back deductions you took to find your 1040 income.  This is the illogical part.  The tax part is worse.  To keep this in context, you pay the AMT on the deductions the law gives you.

For the moment, think about the unfairness of this: The AMT causes you to pay tax on the deductions that the lawmakers gave you.  And in some cases the lawmakers require elaborate calculations to figure out what you owe.  This is wrong.

The good news is that some of our U.S. senators are paying attention and, as you read this, they have the AMT on the chopping block.  We will give you more information on the chopping block later in this article.  Meanwhile, let’s return to how the AMT complicates your taxes by taxing your deductions.

Who gave Us This Craziness?

In 1982, Congress enacted the Tax Equity and Fiscal Responsibility Act that gave us the first comprehensive individual AMT.  The goal was to make sure that no taxpayer could use the deductions authorized by law to avoid all tax liability.

This confirms ignorance and stupidity.  If lawmakers applied the AMT to the traffic laws, they would work something like this:

1.              Post the speed limit at 75 miles an hour.

2.              Give a ticket to everyone going 65 to 74 miles an hour, because that exceeds the hidden, unposted speed limit.

The AMT does exactly this.  The regular tax gives you a deduction for taxes you pay to your state, then the AMT taxes you on your regular tax deduction (this is so ugly it’s hard to write it down).

The bunch that enacted the AMT in 1982 did not know what they were doing.  They passed a law that disallowed other laws they had passed.

With the AMT, taxpayers find themselves in the classic catch-22 (an illogical, unreasonable, or senseless situation).  But the AMT is even worse than a catch-22, because it comes as a surprise to most taxpayers.

Take Dan Butts, for example.  He was an Allstate Insurance agent who paid $10,000 in extra taxes because the AMT attacked and disallowed his employee business expenses.  Surprised and upset, Butts amended his return and claimed that although he was paid as an employee, he was really an independent contractor entitled to all his business deductions.  He ended up in court and won his case, saving himself $10,000 in unfair taxes.

Let’s look at the AMT through the Butts case: As an employee, Butts pays $10,000 more in taxes than he pays as an independent contractor.  In both cases, he is an insurance agent who conducts his business in an identical fashion.  There is something wrong with a law that steals the business deductions of an insurance agent by applying a totally unfair extra tax of $10,000.

Consider this: Whether Butts worked for State Farm or Allstate, is taxable income would be the same.  At State Farm, he would have been an independent contractor and would have paid zero AMT.  At Allstate, Butts was an employee; therefore, he incurred $10,000 in extra taxes, thanks to the AMT.

How Do You Plan for the AMT?

Business deductions!  Most business deductions escape the AMT if they are claimed on

·        Schedule C of your Form 1040.

·        Form 1120 (filed by a C Corporation, otherwise known as a regular corporation).

·        Form 1120S (filed by an S Corporation).

Your planning rule of thumb to avoid the AMT is make the business pay the expenses.  In general, you should not have any deductions on your 1040 for employee business expenses.

Also, you should be aware of your AMT exposure.  If you currently pay the AMT, examine your IRS Form 6251 to see what is causing the problem.  Once you know the cause, you can do something about it.

If you do not currently pay the AMT, find out how close you are to the AMT and what deductions could potentially push you over the edge.

What’s Going On in Congress?

On May 20, 2005, the staff of the Joint Committee on Taxation submitted a report on the AMT for a hearing that was held on May 23, 2005, before the Senate Committee on Finance.  You can read the entire report at www.house.gov/jct/x-37-05.pdf.

The staff was careful not to step on any toes and crafted a mealy-mouthed report, saying some people like the AMT, some people don’t like the AMT, some people think the AMT is a fair tax, some people think the AMT is an unfair tax.  Hogwash!  The AMT is an unfair, completely incomprehensible, illogical tax.  Lawmakers need to kill this tax.

Fortunately, a group has formed with that mission.  A bipartisan group of senators want to abolish the AMT.  On May 23, 2005, probably after reading that mealy-mouthed report from the staff, Sen. Max Baucus (D-MT) introduced S. 1103 to repeal the AMT for taxable years beginning after 2005.  He is joined in his efforts by 14 senators who have co-sponsored the death of the AMT.

Interestingly, the sponsor and eight of the co-sponsors are on the Senate Committee on Finance.  More interestingly, this group would repeal the AMT now, with no revenue to replace the approximately $600 billion that would be lost.  Their rationale: Get rid of this bad tax now, and let Congress recover the lost cash with new tax laws when it implements recommendations from the President’s Advisory Panel on Federal Tax Reform.

Getting rid of it now is the right thing to do.  We would much rather see deductions not allowed in the first place than see them allowed and then disallowed.

What Should You Do?

If you want to see the AMT repealed, you need to tell your representatives that you support S. 1103.  Go to www.senate.gov and www.house.gov and send e-mails to your representatives.  You might ask about their support of, or opposition to, repeal of the AMT and reasons for their position.

Keep on this.  If you don’t get an answer to your e-mail, send another.  If you get a totally unrelated reply, send another e-mail and ask for a proper response.