The American Taxpayer Relief Act finally provided a more permanent solution for many middle-class Americans facing the possibility of being subject to the Alternative Minimum Tax each year. It raised the income thresholds and indexed them for inflation going forward. But the Act didn’t address the loopholes allowing millionaires and billionaires (the very people that the tax was created for) to take excessive deductions, shelters and other tax breaks, resulting in tiny percentages of total income being taxed. Without comprehensive reform, the AMT will continue as is, allowing the highest-end taxpayers to escape, while still afflicting many taxpayers below millionaire status.
An editorial appearing in the New York Times on January 13 explains the problem:
In 2011, more than half of taxpayers in the $200,000 to $500,000 income range paid the AMT tax. However, only one-third of taxpayers who made more than $1 million paid it, according to the Tax Policy Center.
The main way that the highest-income taxpayers avoid the tax is due to the way that excessive tax breaks are defined. Common write-offs for dependents and for state and local taxes are counted as shelters subject to taxation under the AMT. Tax breaks for dividends and capital gains, however, are not counted as shelters subject to the AMT, so the wealthiest Americans are less likely than not-so-wealthy filers to be subject to the AMT. Income-tax rates on capital gains and dividends top out at 20 percent, compared with a top rate of 39.6 percent on salary and wages. The result is that a professional couple with three children in New York City earning $250,000 is more likely to pay the AMT than someone with no dependents in Florida who makes millions a year from a tax-favored stock portfolio.
Until Congress is willing to reduce the impact of everyday deductions, while adding capital gains and dividends to the system, the AMT will continue to allow the wealthiest taxpayers to avoid it while penalizing the upper middle-class.
