An insidious creature lurking in the tax code is getting ready to sucker-punch millions of taxpayers when this year turns into next.
The culprit is the Alternative Minimum Tax (AMT), which Congress brought into being in 1969 as a seemingly harmless means of appeasing popular opinion by taxing a few very rich people who had discovered legal ways to avoid income taxes.
In January 1969, testifying before Congress's Joint Economic Committee (JEC), LBJ's Treasury Secretary Joseph Barr predicted a "taxpayer revolt" because "in the year 1967, there were 155 tax returns in this country with incomes of over $200,000 a year and 21 returns with incomes of over a million dollars for the year on which the 'taxpayers' paid the U.S. government not one cent of income taxes."
Congress responded by creating an alternative tax code, stripped of most deductions, which would apply to people whose allowable deductions under the regular income tax reduced their tax bills below a certain level.
It did not work, however. By 1974, the JEC said in a 2001 report, 244 taxpayers who earned over $200,000 still paid no income tax. Since then, Congress has tried numerous "fixes," creating an AMT so complicated few but tax lawyers fully understand it.
But for all its tinkering, Congress never did two things: 1) Index to inflation the amount of income exempt from the AMT, or 2) allow people subject to AMT to claim deductions for dependent children and for state and local taxes.
Because the AMT was not indexed, and because President Bush's tax cuts lowered the regular income-tax rates for middle-income taxpayers, the AMT stood poised to attack the middle class this year. So, last year, Congress "fixed" it again, passing a temporary increase in the amount of income exempt from the tax. This "fix" expires Dec. 31.
Nina Olsen, the IRS's National Taxpayer Advocate, explained the coming crisis in her annual report to Congress in January. "(T)the exemption amount, after a temporary increase that will expire after 2005, is $45,000 for married taxpayers and $33,700 for most other taxpayers," said Olsen. "As a result, it is now projected that in 2010, 34.8 million individual taxpayers -- or 34 percent of individual filers who pay income tax -- will be subject to the AMT. Among the categories of taxpayers hardest hit, 94 percent of married couples with adjusted gross income (AGI) between $75,000 and $100,000 and with two or more children will owe AMT."