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THE AMT: MORE PATCHES, NO SOLUTIONS

Statements Betray Congresses Philosophy

Congress continues to propose “patches” to the disaster we call the Alternative Minimum Tax (AMT) but there is no permanent, broad-based solution on the horizon. However, several bills addressing difference aspects of the AMT are plodding their way through both houses of Congress. What comes out the other end is anybody’s guess. Two key elements of this continuing debate warrant a brief discussion.

 The “Patch”  

Because Congress never indexed for inflation the income thresholds that trip the AMT, the number of people subject to the AMT has been growing steadily over the years. What began as a way of stripping exotic deductions away from the super-rich in order that they would face at least a minimum amount of tax has grown to encompass approximately 4.2 million people in 2007. Most of those 4.2 million people cannot be considered super-rich since there are only about 1.35 million people who fall into the top 1% of income earners in the county.  

And as if that’s not bad enough, according to projections by various committees of Congress, the administration and the Office of the National Taxpayer Advocate, the number of people hit by the AMT is expected to explode to over 20 million in the next few years. If that’s the case, the AMT will reach into the top 10% of income earners, those making about $108,000 per year. Clearly, these are not rich people when you consider that we’re talking mostly about joint federal income tax returns that typically involve two-income families.  

But Congress simply will not fix the problem by permanently amending the tax code to push the threshold amounts to an economically realistically level; or even better, repealing the AMT entirely. Instead, Congress passes “patches” that are merely intended to postpone the onslaught of AMT pain. So shortsighted is Congress that it even refers to these measures as “patches.” Last year’s patch came so late in the process that it nearly disrupted the entire filing season.  

This year’s patch, H.R. 6275, passed House approval in June but is facing opposition in the Senate. The reason is that many in the Senate want to include “offsets” in the patch legislation. This means that the tax relief that would be created by the patch would be offset by tax increases created elsewhere in the law. In other words, Congress will not give up the money it collects through the AMT unless it can get it elsewhere—and it doesn’t matter how much misery is inflicted on the public as a result.  

A statement by Rep. Charles Rangel (D-NY), chairman of the House Ways and Means Committee, betrays the attitude that too many in Congress have about “government money.” In debating whether the patch legislation should have offsets, Rangel stated that offsets were necessary so Congress could say that we “didn’t borrow the money” to fund the AMT tax cut.  

This statement shows just how twisted the thinking is of those in Congress. Congress believes that all of the nation’s income belongs to the government. When they give some of that income back to those who earned it, that somehow constitutes an “expense” for the government. The “expense” somehow has to be funded through tax increases someplace else. There is no other conclusion we can reach when Congress continues to insist that it find a way to “pay for tax cuts.”  

In the real world, you don’t “pay,” that is, incur an expense, for income that you’ve lost. Instead, when you realize a reduction in income for whatever reason, you adjust your spending to balance the loss. You don’t have the luxury of arbitrarily imposing burdens on some third party to make up for the fact that you’ve lost a portion of your income.

What Rangel and his ilk do not (and apparently cannot) understand is that there is no such thing as “government money.” There is only “taxpayers’ money.” Government gets money by taking it from those who earned it. The nation’s income producers own the money, not Congress. Allowing people to keep more of what they earn is simply not an “expense” that Congress must “pay for.”  

ISO AMT  

Another area where the AMT has decimated many Americans is that of the taxability of incentive stock options (ISO). Thousands of Americans during the mid- to late-1990s were rewarded by their companies with incentive stock options. The options were largely taxable when they were given to the employee as compensation for services. However, with the downturn in the market that occurred during the early part of this decade, many of those stocks depreciated substantially or became worthless. Thus, the employee never had the benefit of the gain for which he was taxed.  

Worse, because the stock is depreciated, the employee also does not have the assets with which to pay the tax. And now to add insult to injury, the AMT kicks in to make sure that the employee also loses the benefit of other deductions, exemptions, etc., that otherwise would reduce his tax. In the end, thousands have faced relentless IRS enforcement action because of what I have often referred to as “phantom income.”  

Senator Charles Grassley (R-IA), the ranking member of the Senate Finance Committee, recently orchestrated the writing of a letter to Commissioner Shulman asking him to back off on collection against those with ISO AMT tax liabilities. Grassley pointed to H.R. 3861, the AMT Credit Fairness and Relief Act, which is working its way through Congress. The Senate version of the measure is S. 2389.  

It would provide relief to citizens with ISO problems in two ways. First it would allow an increase in the AMT refundable credit for those with long-term unused minimum tax credits from prior taxable years. Second, it would outright abate any tax delinquency attributable to the application of special AMT rules for the treatment of ISOs. This would simply knock out the debts owed by anyone whose liability grew from the phantom income problem described above.  

Closing Loopholes to Pay for AMT Reform

 Another astonishing statement by Rep. Rangel is that Congress must “search the tax code for loopholes that can be closed” so Congress can fund AMT relief with what amounts to tax increases. The fact of the matter is that Congress has been closing loopholes in the tax code for more than twenty years.  

The AMT was created in the first place because a literal handful of tax returns filed during the late 1970s showed no tax owed, despite the fact that the gross income on those returns was well into the mid-six figures. Ever since then, Congress has been closing loopholes and has relentlessly attacked tax shelters uninterruptedly for twenty years. There is now a complex web of regulations and penalties in the code designed to eliminate the kind of shelters used decades ago by the super-rich to eliminate their tax liabilities.  

We are to the point now where “loopholes” for purposes of AMT, are defined as home mortgage interest, medical and dental expenses, employee business expenses, your standard deduction if claimed, and even personal dependent exemptions. Are these really “loopholes?”  

The National Taxpayer Advocate Says Act Now

For years, the National Taxpayer Advocate has had problems associated with the AMT on her annual list of the most common problems experienced by taxpayers. She has also had AMT reform on her list of legislative priorities that she presents to Congress annually. She has been imploring Congress to fix or repeal the AMT for nearly a decade.  

Congress doesn’t listen because Congress only cares about getting the money. This is made clear to me by the twisted thinking reflected in the statements by Rep. Rangel. But recent economic turmoil shows that it’s now more important than ever to reduce the tax burden on the public. People need to be able to keep more of what they earn so they can stabilize their own financial situation. And there’s no better place to start than with the AMT.

Call to Action

I strongly encourage you to contact your representative and senators and ask them to support not only the bills mentioned here, but a full repeal of the AMT—and sooner than later. Remind them that Congress does not own the wealth of the United States . The citizens who produce it own it. Reform “patches” that continue to tinker around the edges of the tax code but which offer no real, permanent solutions to these profound problems are not only irresponsible, they just make matters worse.  

You can easily contact any representative or senator by going to www.thomas.gov. That site will link you to the website of every member of Congress. You can quickly send an e-mail to any of them.

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