Lynn Westmoreland

Tax Talk: The Mother of All Taxes: The Alternative Minimum Tax (AMT)

Thirty one million. No, that’s not the number of viewers who watched the Olympics each night, or the Megamillions in the lottery up for grabs this week.  It’s the number of households that will be affected by the Alternative Minimum Tax (AMT) in 2013 if Congressional Democrats and President Obama don’t extend the current tax cuts.

In the 1960s, then-Treasury Secretary Joseph Barr announced that 155 high-income households had not paid a dime in federal income taxes by taking advantage of so many tax credits and deductions.  In response, in 1969, Congress enacted the Tax Reform Act of 1969 creating the Alternative Minimum Tax (AMT), which would make sure the wealthiest Americans could not abuse the current tax code to completely eliminate their tax liability. The AMT is essentially an additional tax on high-income households.  In 1982, it was reformed and changed from an add-on tax to a parallel tax system for high-income households: a two-tiered tax rate structure is assessed and then compared to the regular income tax, and the taxpayer pays whichever is greater.

The government gave itself a big pat on the back – they had fixed the tax problem and made sure Mr. and Mrs. Moneybags couldn’t cheat the system while everyday Americans still had to pay their taxes.  Unfortunately, as most people know, adding more laws to try to cover up bad laws just created an even worse law.  Mainly because the bureaucrats forgot one very important thing.  They forgot to allow the AMT to adjust for inflation.

Forty two years ago when the AMT was set, standard of living and income was dramatically lower than it is now.  In 1969, the median household income was $9,302.  So when Congress set the AMT at $45,000 for married couples and $33,750 for singles, those were very wealthy people.  However, in June 2012 the average household income was $50,964.  So, since the AMT was not adjusted for inflation, the average American would be impacted by it every year.  So much for getting Mr. and Mrs. Moneybags.  Now it’s also getting Mr. and Mrs. Mainstreet.

The 2001 cuts temporarily increased the exemption amount to make it more on par with today’s income levels.  Essentially, the 2001 tax cuts adjusted the AMT for inflation like the original drafters of this law should have done.  With the current adjustments, the AMT impacts just four million American taxpayers.  And every time we have extended these tax cuts, we have included an additional ‘fix’ for the AMT so that 27 million Americans won’t be hit with a monster-sized tax bill come April.  

Congress has two choices: renew the current tax rate or do nothing, causing tax rates for all taxpayers to increase. Doing nothing is the worst thing we can do right now. We simply cannot afford higher taxes and more regulations. That’s why I am going to continue to fight to renew all of the 2001 and 2003 tax cuts.

This was my last edition of Tax Talk.  I hope you enjoyed it and found it helpful as you navigate the federal tax system.  Congress will return to Washington next week and extending these tax cuts will be a major item on our agenda.  I encourage you all to follow along with the discussion and let me know your opinion.  Also, if you missed any of these columns along the way, visit my website. And if you liked the column, let me know.  The more feedback I get on things like this, the more I can find the best way to get information to you.