The 2001 Tax Cut

AMT Relief?

I guess we should give them credit for trying. Yet the AMT relief included in the new law can only be termed pathetically inadequate.

The Issue
The alternative minimum tax, or AMT, is supposed to hit high-income people who claim tax benefits so large that they don't pay their fair share. Flaws in the design of this tax cause more and more ordinary people to pay the tax each year. The number now paying AMT is around 1 million, but without some form of AMT relief, millions more people will pay AMT in years to come. They'll mainly be people who have large families (because personal exemptions are not allowed under the AMT) and people who claim large amounts of state and local tax as an itemized deduction (also not allowed).
    Everyone agrees this is a problem, and it only gets worse when the 2001 tax cuts go into effect. Why? Because the amount of AMT you pay depends on how much regular income tax you pay. When your regular income tax goes down, your AMT goes up. Overall you don't pay more tax, but you're just swapping one tax for another. For millions of people, AMT will take away some or all of the advantage of the tax cuts in the new law.

Big Whoop
Congress responded to this issue with a timid increase in the "AMT exemption amount": $2,000 for singles and $4,000 for married couples filing jointly. The increase takes effect in 2001 (it affects the current year) � and goes away in 2005. Unlike the rest of the new tax law, which self-destructs in 2011, this modest amount of AMT relief requires new Congressional action within three years to stay alive.
    The relief goes away just when the need becomes greater. As inflation wears away the AMT exemption and tax rates phase down, the number of unintended AMT victims increases geometrically. So why didn't Congress provide more effective relief, and make it permanent? No room for this in the budget, with all the other tax goodies in the bill.*

* Other provisions in the new law protect certain credits from being affected by the AMT.

Perspective
Here's a quote from the Conference Committee Report for the new tax law:

The provisions relating to the rate reductions, increased standard deduction, the expanded 15-percent rate bracket, and the increased child tax credit are affected by the alternative minimum tax rules. Although the bill provides relief from the alternative minimum tax, additional individuals will need to make the necessary calculations to determine the applicability of the alternative minimum tax rules. It is estimated that for the year 2010, 18 million additional individual income tax returns that will benefit from the rate reductions, increased standard deduction, expanded 15-percent rate bracket, and increased child tax credit would be affected by the alternative minimum tax. For these taxpayers, it could be expected that the interaction of the provisions with the alternative minimum tax rules would result in an increase in tax preparation costs and in the number of individuals using a tax preparation service.

by Kaye Thomas    
May 27, 2001    

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