Saturday, July 23, 2011

Hell Must Be Freezing Over; AMT Is On The Chopping Block

 Jul. 20 2011 
The “Gang of Six” US senators has released a summary of their plan to reduce the Federal budget deficit.  One of the plan’s provisions is eliminate the Alternative Minimum Tax or AMT.  Hell must be freezing over.
In 1969, Congress wrestled with the ability of high income earners to deduct away their income tax liability.  Congress effectively created a second income tax system that disallowed certain deductions and imposed a higher, flat tax rate on all income.  It is called the Alternative Minimum Tax or AMT.  Technically, all income tax filers are supposed to do the AMT calculation on every return.  For some AMT is due, for others AMT is not due.  In the past, few filers owed AMT.  But, according to the Congressional Budget Office, in 2010, over 50 percent of two-income/middle-income families had been pulled into the AMT system, much to their surprise.

While the intention was good, it is now having disastrous effects.  Clearly, the AMT is affecting individuals it had never intended to affect.  Interestingly, a review of Congressional committee minutes of the legislation that enacted the AMT finds that Satan himself testified the AMT would be a good thing.  This, of course, now casts doubt upon Congress’ true intentions.  Unfortunately, no one is calling for hearings on the matter.

It really wasn’t until the mid to late 1970s that Congress thought about indexing tax brackets to inflation to counter what is known as “bracket creep.”  Bracket creep occurs when the dollar level of income tax rate brackets remain static.  When someone receives a pay raise to offset inflation, he or she gets bumped into a higher income tax rate bracket.  The AMT threshold is static and not indexed to inflation.  Over the years, Congress has put in many temporary relief measures but all sunset eventually.  As mentioned above, the AMT is now affecting people it was never intended to affect.

The Internal Revenue Code has seen complete overhauls about every 20 to 30 years.  In a previous article, I forecast that it would likely see another overhaul by 2015.  I have also mentioned that both Democrats and Republicans were talking about the need for a major overhaul and were not too far from each other conceptually.  When I say that they were not too far from each other, I mean the structure of the Code.  And, officials from the Treasury Department and the OECD have been in discussions to align US tax policies with those of most other countries.

If Congress follows through on the Gang of Six’s proposal to eliminate the AMT, hell might well freeze over.

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