Reform of the universally despised alternative minimum tax (AMT) is perhaps the most anticipated of President Bush’s proposals. Congress created this tax in 1970 to prevent individuals making more than $75,000 from avoiding paying any income tax. Originally it affected about 19,000 taxpayers. That number has grown, according to the IRS, to 2.5 million; some estimate that by 2010, it could reach 30 million—or four out of every five individuals earning between $75,000 and $100,000 a year. The current AMT exemption is $58,000 for married couples and $40,250 for unmarried individuals. After 2005, it reverts back to $45,250 and $33,000, respectively.
“It was never indexed for inflation, and now because of that and growth of income for everyone, many middle-class taxpayers are caught in it,” says Mark Watson of Asset Management Advisors in Palm Beach, Fla. “But it’s insanely complicated and can play havoc with our clients’ portfolios.”
The AMT has a pronounced affect on affluent individuals who live in states with high state income taxes, Watson notes, because the AMT prevents many of them from deducting those state income taxes, and it forestalls other deductions as well.
The AMT can be understood as a separate tax system. It has its own set of rates and rules for deductions, and they are typically less generous than the standard regulations. “The AMT causes me more grief than any other tax,” says C. Joseph Ramos, president of Private Consulting Group in Larkspur, Calif. “By my count, there are 43 preference items and adjustment areas that go into the calculation. It’s such a complex calculation that we are forced to run accurate projections into tax return software prior to year-end, even to determine simple things like whether you’ll lose the deduction for estimated state tax payments if it’s made in December rather than January. It makes the tax planning piece very difficult.”
“This is the biggest boondoggle I have ever seen in my 25 years as an accountant,” says Cynthia Conger of Arkansas Financial Group in Little Rock. “We’ve had several clients who, because of inappropriate investments, fell into the AMT’s tax rate of 26 percent when they could’ve been taxed at the capital gains rate of 15 percent. We pay very close attention to the AMT when we’re doing portfolio changes. Given my druthers, I’d like to see it done away with.”
Eliminating the AMT would cost the government dearly in revenue—some estimate $700 billion over the next 10 years. “Projections are that, within a year or two, the AMT will raise more revenue than the normal income tax,” notes Bruce Bartlett, senior fellow at the National Center for Policy Analysis in Washington. “A lot of people are just under the threshold and going to get bumped up into it real fast when the temporary fix expires.” With record budget deficits looming, replacing the AMT will require creative solutions, Bartlett notes.
Instead, some analysts like Conger expect Congress will simply raise the minimum threshold to better reflect contemporary income levels. That may take some time, Ramos says. “I haven’t heard much widespread support to see it completely go away,” he notes. “But as more middle-class people get caught up in it, you’ll see support for a repeal ratcheting up.”  Return to main article: "Taxing Decisions"
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