AMT Could Nullify Benefits Of Bush's Tax Cut

23 April 2003 An once-obscure tax enacted over thirty years ago to sweep high income earners into the tax net could penalise many millions of middle income earners in the coming years if not reformed.

The alternative minimum tax was passed into law in 1969 and was designed to limit the potential of high net worth individuals to avoid taxes by employing legal deductions, tax credits and other loopholes.

Single people earning under $33,750 per annum and married couples filing a joint return of less than $45,000 will be generally exempt from the alternative tax. However, once income climbs above these amounts, depending on the amounts and nature of any tax credits claimed, the tax starts to kick in at a rate of 26%, rising to 28% on incomes above $175,000. Fewer credits and deductions are permitted under the alternative tax, and anybody falling within its reach will inevitably end up with a higher tax bill.

Reports estimate the alternative tax will affect a relatively small 1.5 million people this year. However, by 2011, it is thought some 36 million could find themselves liable for the tax. This is largely due to the fact the tax is not linked to inflation and consequently as incomes rise more people will fall into its reach.

The government is aware of the potential effect of the tax, and is working with Congress to fix the problem, according to a Treasury Department official. However, many lawmakers are acutely aware that the hard won gains brought about by President Bush's tax cut package may well be nullified by the presence of the alternative tax.

"At least for the middle-class people and down, you don't want the anomaly of giving a tax decrease on the one hand and a tax increase on the other hand," said Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee.

As a short term solution, the Bush administration intends to provide limited relief from the tax by extending protection for middle class tax credit claimants such as the $500 child tax credit.

One option is for Congress to repeal the alternative tax outright. Even the IRS has been an advocate of this due to the alternative tax's mind boggling complexity. However, some fear it could create more problems than it solves by allowing more wealthy people to escape income tax.