WASHINGTON – The number of taxpayers likely to be entangled in the complex alternative minimum tax is projected to reach 1.5 million this year, twice as many as three years ago. Increasingly, unsuspecting middle-class people are being affected.
“The AMT is creeping up on those who weren’t intended to be victims,” said Rande Spiegelman, senior personal finance planning manager at the KPMG accounting firm. “It was meant as a way to make sure extremely high-income folks end up paying at least a minimum amount of income tax.”
But the tax is no longer limited to the wealthy, mainly because it has only been adjusted for inflation once since Congress created it in 1969. As incomes rise, more and more people can become exposed to the tax, particularly if they have large itemized deductions or numerous exemptions for dependents.
People living in a state with high personal income taxes are particularly vulnerable, Spiegelman said. Big families with lots of children could also pay the price.
The minimum tax, with a top rate of 28 percent, actually operates in parallel to the regular income tax system. The big difference is that most usual deductions aren’t allowed, meaning that the 28 percent rate applies to income that wasn’t exposed to tax in the regular system.
“When you’re in AMT, you’ve paid all your tax according to the regular rules and brackets. But it isn’t enough,” Spiegelman said. “They are going to tack on another 28 percent on income you didn’t have to pay tax on otherwise.”
According to the congressional Joint Committee on Taxation, 1.5 million tax returns will be affected by the minimum tax in 2001. That’s only 1.1 percent of the estimated total of returns, but nearly double the 828,000 returns reporting minimum tax in 1998.
By 2010, unless Congress enacts some changes, almost 15 million tax returns could be affected.
Congress has temporarily ensured that certain personal tax credits, such as the $500 per-child tax credit and education credits, cannot trigger the minimum tax — but that law expires at the end of 2001.
“The more voters are exposed to the AMT, the more likely Congress is going to do something about it,” Spiegelman said.
The Internal Revenue Service has a worksheet in the instructions for Form 1040 for taxpayers to determine if they owe alternative minimum tax; most tax computer software flags it automatically. Form 6251 is used to figure the minimum tax.